Innovative Finance for Development: current trends and the future of income streams for NGOs

First meeting of the Community of Practice on Innovative Finance: impact bonds, performance-based contracts, impact investments. What do these trends mean for the present and the future of NGOs?

agenda May 2, 2019

On Tuesday, April 23, the first meeting of the Community of Practice on Innovative Finance was held as a follow-up to last February’s session on “How to raise sustainable income streams: the importance of non-profit business”. The discussion firstly focused on the notion and the various possibilities of innovative finance (IF), on the basis of Interaction’s recently published Report: Innovative Finance for Development – A Guide for International NGOs. Subsequently, we moved on to reflect upon specific cases which were brought in by some of the present organisations.

Seven different organisations (5 NGOs, 1 social enterprise and 1 consultancy) attended the meeting. Han Valk consultancy participated in the capacity of external experts on the matter, with Maarten Mulder opening the session with a brief presentation on the notion and practices of IF. IF was defined as a complementary tool for NGOs to generate income streams, in addition to traditional funding (donations and grants). Moreover, the group agreed upon that IF is a means to an end, and not an end in itself – the real objectives being to achieve more impact, increase cost-effectiveness, leverage additional funds, stimulate innovation etc. Subsequently, the present organisations presented their experiences with innovative finance for development (IF4D).

The Netherlands Red Cross – Disaster management cycle, results-based financing and humanitarian impact bonds

The Red Cross Movement is already doing a lot in the area of IF4D, acting along the whole disaster management cycle (before, during and after). Some instruments worth mentioning are forecast-based financing (before), cash and digital transfer (before and after), Humanitarian Impact Bonds. The group particularly reflected on the advantages and disadvantages of the latter and identified a number of challenges. Firstly, impact bonds are a highly complex financial and legal construction and therefore require a lot of time, effort and money to set up. The second issue refers to goal fixation and measurability: how high/low should each organisation set its impact objectives, as to ensure they are achievable and measurable? It is interesting to notice that similar conclusions regarding social impact bonds were drawn in an article recently published by De Dikke Blauwe.

Impact Investing

Oxfam and Solidaridad both noted that another interesting innovative instrument is that of (Inclusive) Impact Investments, i.e. the provision of capital and venture assistance to SMEs as to boost social impact. Both organisations have been or are currently experimenting with this method, which is promising but mainly suited for NGOs that have more affinity with the business world. Han Valk suggested that in this process, NGOs could play the role of intermediary as in microfinancing projects.

From NGOs to social enterprises?

Talking about different financing instruments, the following questions were raised: how is it possible as an NGO to “earn your own money,” i.e. to generate your own cash flows? Is it possible to do so while formally keeping the foundation status, or is it necessary to become a social enterprise? Two possibilities were mentioned: use the legal construction of an FFI  (fiscaal fondswervende instelling) or own a private business entity (bv) under the NGO itself. Another model which might be interesting to explore and experiment is the social franchise one, employed by NGOs like Aflatoun and Dance4Life.

How does the future look like?

In the end, the group reflected upon the question: how long can NGOs go on with the current financing model, which still mainly relies on (governmental) grants? The participants were divided about the issue. Most of them were convinced of the fact that governments will not stop funding NGOs very soon and that big funds will not disappear in the short term. However, is it true some significant shifts are already taking place and NGOs should prepare to anticipate and act upon those. Inter alia, the move towards performance-based contracts represents an undeniable trend in the development sector’s institutional setting.

Follow-up and related events

We will soon post updates on the following steps on this trajectory on IF4D, so keep an eye on our website! The idea is to organise a number of short sessions in the next few months, every time focussing on one or two specific innovative financing instruments which would be illustrated through cases brought in by Partos’s member organisations. Willing to participate and contribute? Send an e-mail to luca@partos.nl.

If you want read more about the session and find additional material, make sure to check out our Dropbox!

Moreover, our Inspiration Swarm’s member Melanie Rieback, who delivered the session on non-profit businesses mentioned above, is giving a masterclass series on Post-Growth Entrepreneurship. This course (six one-hour sessions) will take place at the VU in the month of June. As a pilot program, it is free of charge. Subscribe via this link!

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