Challenge funds in international development

The use of challenge funds to promote economic and social development continues to grow, but has been the subject of relatively little research. This paper develops a definition of what challenge funds are and how they differ from other development funding mechanisms, taking into account their purpose, financial terms, agency relationships, screening processes, selection mechanisms, implementation and risk sharing characteristics. A challenge fund provides grants or subsidies with an explicit public purpose between independent agencies with grant recipients selected competitively on the basis of advertised rules and processes who retain significant discretion over formulation and execution of their proposals and share risks with the grant provider. This paper draws on a review of fifty challenge funds being operated by international agencies in order to explore variation in their characteristics. A distinction is drawn between business oriented ‘enterprise’ challenge funds and civil society or social development challenge funds, and between relatively ‘light touch’ and ‘hands-on’ approaches to their management. The paper concludes with suggestions for further research.