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Innovative Finance for Development: Innovative Finance for Development (IF4D): A Year of Discovery

Innovative Finance for Development
Innovative Finance for Development (IF4D): A Year of Discovery

With support from The Rockefeller Foundation, InterAction conducted research aimed at exploring the state of IF4D inside of InterAction’s membership. To get a sense of the level of engagement in IF4D among InterAction’s member organizations, InterAction disseminated a comprehensive survey to CEOs, CFOs, and IF4D decision-makers at our member organizations.

The survey findings indicate that more INGOs are seeking to expand their activities in, or to enter, the IF4D market than INGOs already in the space. Furthermore, the findings highlighted INGOs’ preference for types of financial instruments, their organizational motivations, the barriers they will meet, and specific resource needs to build their capacity. We also see there is overlap in the most salient challenges for both INGOs with experience in IF4D and the novices.

Read the full report here.

Key Findings

  • Current engagement: Demand for IF4D is strong among survey respondents. More INGOs are seeking to expand their activities in, or to enter, the IF4D market than INGOs already in the space.
  • Widespread innovation in the use of financial instruments: We were able to identify at least 17 instruments currently used by a group of InterAction members. Future research will likely uncover a few more.
  • What type of instruments are being used? By whom?: There are important differences between the financial instruments used by our members already in this space and those who are seeking to enter.
    • For the more experienced group, the most common instruments are performance-based contracts and others typically associated with impact investing, i.e. investment vehicles that are structured and funded to target a specific social challenge, often blending investors with different risk and return profiles. Specifically, we refer to externally managed funds where the NGO may be engaged as a limited partner (LP). The least common are results-based approaches (except for PBCs).
    • New entrants are most interested in results-based approaches, including SIBs/DIBS, debt swaps/buy-downs, conditional cash transfers, awards and prizes, and advance market commitment, followed by voluntary contributions; they are least interested in impact investing tools.
  • What roles are InterAction members playing?: There are similar differences in the roles played by experienced NGOs and the roles new entrants expect to play. The most common role played among INGOs already managing IF4D approaches was as an investor. In contrast, beginners in the field are interested in playing the role of recipient.  We will seek to uncover the reasons for this stark difference.
  • What are the main barriers to entry, and beyond?: We sought to identify the key barriers to adopting new mechanisms. We now know these are significant, and shared by the experienced and new entrants, even if at different levels. Among the top challenges we found: a significant informational gap for both groups about new instruments and how do they work; and the need for curated information about opportunities and partners.
  • Which learning vehicles and other resources do you need?: Experienced INGOs and new entrants expressed similar resource needs: connecting with funders, and developing toolkits and frameworks. Both groups would welcome support in identifying the “right fit” instrument for their organizations and in sourcing investment.
  • What are your strengths?: We asked our members to identify their assets for IF4D. We found convergence between both groups. Some of the assets identified are: their organization’s reputation and credibility, technical expertise, sector expertise and local knowledge.
  • What challenges do we need to tackle right now?: IF4D activities place new burdens on INGOs across various dimensions. Compared to traditional development and grant management, implementers report their IF4D engagement(s) required somewhat or considerably more: time to implement, external partner engagement, and rigor in impact measurement and evaluation. To overcome this and other challenges, we need to strengthen our internal capacity to engage in IF4D, and think about dedicating sufficient resources and staff, with sufficient internal skills and expertise to think about our IF4D initiatives.
  • Sectors: Food security and agriculture is the top sector of activity for implementers and is of interest for new entrants as well.
  • Geography: Although members are implementing IF4D activities in all regions of the world, they tend to be concentrated in Southeast Asia and Latin America and the Caribbean.