What is Challenge Fund

The Business Finance Challenge Fund (BFCF) is a tried and tested mechanism for donors to engage with the private sector as partners to achieve the development objectives of the donor and the commercial objectives of the private sector partner. It is more than just a matching grant facility. BFCF aims at testing new approaches in the financial sector, by tipping investment decisions from “no go” to “go”, largely by absorbing some of the financial risk, and triggering innovation, by facilitating to speed up the implementation of new business models or technologies that combine commercial viability with high social impacts, but where the commercial returns are uncertain and have a high risk element. The Rationale of the BFCF intervention is to catalyse and foster innovations in lending products and delivery channels, and stimulate effective BDS aimed at imparting financial literacy and skills development of MSEs; enabling them to access finance and manage their businesses on a commercially viable and sustainable basis.

Currently, there are 16 projects from 2 rounds of the BFCF, with a consolidated funding commitment for 2 rounds of approximately GBP £ 7 Million (BDT 68Crore), and fund disbursement of GBP £ 1.1 Million (BDT 11 Crore) so far. 180,000 MSEs are expected to have convenient access to Finance and Financial Services, with GBP £ 34 Million or BDT 333 Crore made available for financing for MSEs in Bangladesh by the end of the project.

BFCF Rationale

Despite significant strides in addressing Micro and Small Enterprise (MSE) financing in Bangladesh, the segment remains underserved due to a number of constraints. The types of products that are currently provided by banks, MFIs and NBFIs do not match the cash flow of the small enterprises and therefore do not provide the necessary support in their businesses; high transaction cost of doing business for small enterprise financing; the widespread locations (outreach) of the small enterprises make it difficult to easily access them for sales visit, credit assessment, monitoring and collection. This is where BFCF fits in by supporting banks and financial institutions, and BDS providers to address these challenges and overcome the issues to enable formal sector financial inclusion of MSEs in Bangladesh.

(The Challenge Fund is a tried and tested mechanism for donors to engage with the private sector as partners to achieve the development objectives of the donor and the commercial objectives of the private sector partner. It is more than just a matching grant facility).

The overall objective of the BFP-B Program is to provide increased access to finance for the MSEs that are currently unserved / underserved by the formal financial sector, but may represent credible borrowers with sound business propositions.

The Rationale of the BFCF intervention is to support this overall BFP-B thematic objective of increased financial inclusion of the MSEs by catalyzing and fostering innovations in lending products and delivery channels, and stimulating effective BDS aimed at imparting financial literacy and skills development of MSEs, to enable them to access finance and manage their businesses on a commercially viable, sustainable basis. The CGF may scale-up the innovations triggered by BFCF, by supporting bank lending to hitherto unbanked (usually due to lack of collaterals), but otherwise creditworthy MSE borrowers. The Policy component will support the BFP-B objective by overcoming regulatory impediments and ensuring a cohesive strategy for financial sector policy reforms.

BFCF aims at testing new approaches in the financial sector, by tipping investment decisions from “no go” to “go”, largely by absorbing some of the financial risk, and triggering innovation, by facilitating to speed up the implementation of new business models or technologies that combine commercial viability with high social impacts, but where the commercial returns are uncertain and have a high risk element.

BFCF is a competitive facility through which businesses, banks, NBFIs and MFIs can apply for grant funding to test innovative business concepts that will increase financing for MSEs. BFCF provides a matching grant to innovative, commercial driven projects in the financial sector to help absorb some of the commercial risk in triggering innovation, speeding up implementation of new business models and/or technologies that have the potential to positively impact on MSEs in Bangladesh. BFCF will impact on MSEs by providing them with new financing products, and reaching out to new MSE clients which financial institutions have not previously dealt with.

Objectives of CF

The BFCF offers a challenge to the private sector and other target fund beneficiaries to accomplish the pre-defined objective of formal sector financial inclusion and business sustainability of MSEs, often involving technological innovations and other specified outcomes. The BFCF instrument allows the private sector to compete in an economically efficient and transparent manner for co-funding projects to ensure that the donor receives good value for money and the partners’ objectives are concurrently accomplished.
The three major Objectives of BFCF are reflected by the windows below:

Window 1: BDS Services to Improve MSE Access to Finance: Deliver new products, and services that business support services to unbanked Micro and Small Enterprises (MSEs) to improve their ability to access finance from the formal financial sector (Banks, Non-Bank Financial Institutions and Micro-Finance Institutions). Fund size for this window would be GBP150,000-GBP450,000.

Window 2: New Products, Delivery Channels and Business Models to Increase MSE Financing: introduce new innovative financial products that address the needs of the underserved and unbanked Micro and Small Enterprises (MSEs) sector. Fund size for this window would be GBP350,000-GBP1 Million.

Window 3: Support Women Entrepreneurs access to finance: Introduce innovative business models specifically targeted to women to either: i) improve access to BDS enabling female owned MSEs to access finance; ii) access to finance for female entrepreneurs through specifically targeted innovative products and delivery channels. Fund size for this window would be GBP250,000-GBP750,000.

BFCF will focus on initiatives that have a direct impact on improving the MSEs’ ability to access finance. Since MSEs differ in terms of sector, business model, working capital cycle and their scale of operations, it is necessary to ensure that the products and services being supported through the Fund are appropriate to the respective needs of the MSEs, and facilitate their ability to access finance. Hence, CF grant funding should focus on projects which can deliver customized products and solutions, catering to the diversified needs of MSE businesses and aimed at improving their ability to access finance.