About a year ago Esther Tino started a tailoring business with two of her neighbors. After six months, they had sold almost 50 dresses to their fellow residents of Aduka village in Eastern Uganda. A year later, Esther had saved nearly 100 dollars in her savings group, she’d purchased chickens and goats and a real bed with a brand-new mattress. If her children fell sick, she was confident she could access treatment for them. For the first time, her husband involved her in household decision making. Esther Tino was able to accomplish this through her participation in the Village Enterprise “Graduation” program.
Village Enterprise’s program is designed to provide participants—people living on less than $1.90 per day in rural Africa—with a sustainable path out of extreme poverty. Village Enterprise helps create and sustain businesses through a US$150 cash grant, business and financial literacy training, mentoring, and access to savings.
When our team was fundraising for the cost of having Esther participate in our program, we sought donors who could cover the costs of providing her with trainings, mentoring, seed capital, and access to a savings group. While these donors were intending for their donations to ultimately change Esther’s life, they were paying for inputs, not impact.
Traditionally, funding for development programs, like Village Enterprise’s Graduation program, is sourced from donors who pay for inputs and hope for impact. For example, maybe a philanthropist in the Bay Area wants to support entrepreneurs in Sub-Saharan Africa, so they donate to Village Enterprise. Or maybe a small foundation is eager to empower East Africans, so they offer Village Enterprise a grant to support female participants. Or maybe there is a USAID project to invest in youth entrepreneurship and contracts with Village Enterprise to implement our program with youth. We get a certain amount of money upfront from the philanthropist, the foundation, and USAID and we formulate a budget that specifies we are going to spend that money each quarter—some to pay our training staff, some to supply our seed capital, some to cover the costs of mentoring visits for our participants’ small businesses.
But what if the philanthropist, or the small foundation, or USAID wanted to be sure that their contribution could have guaranteed impact? What if they wanted to ensure that they were paying for results like Esther Tino experienced?
In 2017, Village Enterprise was selected to implement what is the first Development Impact Bond in Sub-Saharan Africa based on promising results from a randomized controlled trial conducted by Innovations for Poverty Action, evaluating variations of our Graduation program. In October 2017 Village Enterprise launched the first Development Impact Bond for poverty alleviation in Africa. For the first time, we are being paid for the results we achieve, instead of the interventions we provide.
Our model of results-based financing begins with a vision: in our case, a world free from extreme poverty. Several parties who share this vision came together to make it a reality. To start, Village Enterprise receives investment in the form of working capital from pioneering impact investors like the Delta Fund, which will cover the costs of implementing our program for over 13,000 households across Kenya and Uganda. Then, USAID DIV (Development Innovation Ventures) and DFID, along with an anonymous funder, agree to pay back Village Enterprise and our investors the original investment plus a return if we achieve the agreed upon outcomes: increases in consumption (as a proxy for income) and net household assets. Impact will be assessed through a randomized controlled trial (RCT) conducted by IDinsight over the course of the DIB. Instiglio, a pioneer in results-based financing, will act as the project manager and process evaluator. And the Global Development Incubator (GDI) will serve as the trustee of the outcome fund, holding it in escrow until the results are realized and confirmed.
We believe that implementation of a development impact bond will allow us to not only improve more lives like Esther’s, but to also demonstrate to others the potential that results based financing has to deepen and broaden impact throughout the developing world. Here’s why:
- Making money more effective. By tying funding to measurable results, the Village Enterprise DIB ensures that funding creates a real impact, providing a significantly greater guarantee of value-for-money compared with pay-for-inputs funding.
- Allowing Village Enterprise to adapt to change. By shifting focus from activity to impact – that is, by reimbursing results rather than receipts – impact bonds give service providers more flexibility to innovate and iterate to get results.
- Incentivizing better programs. By tying funding to results, impact bonds make it attractive and profitable for service providers to improve their programs.
- Attracting new forms of capital. By creating an investment opportunity that includes a financial return, impact bonds invite the private sector to participate in ending poverty.
More than 767 million people worldwide still live in extreme poverty. Esther Tino used to be one of them. But now, she is one of the 850,000 people whose lives have been transformed by the Village Enterprise program. The DIB will allow Village Enterprise to reach 13,800 more households, changing the lives of nearly 90,000 people. Development Impact Bonds, like the one Village Enterprise is implementing, have the potential to achieve scale and guarantee impact in way that is unprecedented. One household at a time, results-based financing mechanisms like this have the potential to accelerate our progress toward ending extreme poverty.
Hannah McCandless is a Program Associate at Village Enterprise, based in Hoima, Uganda. She graduated from Ohio State University, where she studied International Development and Swahili. While enrolled at Ohio State, Hannah spent a year living and working in Arusha, Tanzania on a Boren Scholarship funded by the National Security Education Program. Hannah has been with Village Enterprise for about two years and works to deepen impact through program innovations and contribute to Village Enterprise's voice in the development space through communications.