Leveraging Nonprofits’ Strengths to Boost Impact Finance

BY: Andreas Müller, Siham Boukhali, Paula Carrión - 21. August 2024

The international development community is closely following the ongoing discussions around shifts and reductions of (already stagnating) official development assistance (ODA) and the ever-growing gap of funding to reach the Sustainable Development Goals – which is currently around $3 trillion per year. How can we close this gap? Support from governments, NGOs and development actors isn’t enough. Resources from the private sector must be leveraged.

The assets managed by impact investors are increasing year over year, and the pressure from donors to involve private sector funding for the implementation of development projects is growing. To survive in this evolving funding climate, nonprofits and development actors must diversify their incomes by expanding their network to the private sector, trying to leverage private sector funding, and diversifying traditional sources of income. This includes collaborating with large multinational companies as well as with asset managers and impact investors. New and innovative financial mechanisms and solutions can have a catalytic effect as they help to leverage additional funding from the private sector or to apply existing “traditional” ODA more effectively.

Tapping into nonprofits’ context knowledge

Internationally focused nonprofits like Helvetas possess several strengths that make them valuable players in the impact investing space. Our deep knowledge of the regions and industries that are often the targets of typical investment firms sets us apart. Our expertise in understanding and navigating local contexts and implementing projects in our partner countries makes us impact specialists, especially since impact investors often lack a comprehensive understanding of these contexts and seek to minimize risks.

After decades of working with local partners in many low- and middle-income countries, nonprofits have built extensive networks and private sector relationships. This experience and knowledge represents an important offer to impact investors. We can help investors minimize risks while guiding their investment strategies towards our goal of maximizing sustainable benefits for poor and disadvantaged groups.

But to achieve these goals and partner with impact investors, nonprofits need to enhance their familiarity with impact finance mechanisms. Accordingly, Helvetas and other nonprofits are increasing their in-house expertise on financial instruments and collaborating more frequently and more intensively with financial experts. This has helped to better align with the expectations of impact investors, to create a common understanding among the different stakeholders active in this space, and to make strides towards changing the outdated perception among some impact investors that nonprofits are solely charity and humanitarian organizations.

Nonprofit challenges in impact investing

Despite these strengths, nonprofits face several key hurdles when entering the impact investing arena. Our experience shows that a major constraint for the underserved people we work with is the lack of access to and the availability of (fair) finance to support the growth of businesses and to create decent incomes and jobs. Available financial services are often underperforming, inexperienced or not affordable for small businesses.

Impact finance can be a valuable alternative source of much-needed capital and expertise. Sectors where Helvetas operates (e.g., water, sanitation and hygiene; vocational skills development; private sector development; and agriculture) have recently seen increasing inflows of capital from impact investors. We are committed to improving access to finance and creating positive social and economic impacts across all these sectors.

While entering the impact investing space may require overcoming competency gaps and other manageable obstacles, the unique strengths of nonprofits – in particular our deep understanding of low- and middle-income contexts – can significantly contribute to the success and effectiveness of impact finance activities.

Helvetas’ role in impact finance

Over the last two years, Helvetas has gradually built up our in-house expertise and our organizational position in the field of impact finance. This has included:

Partnerships with impact investors and expert organizations: Helvetas has established a vast network of impact investors and expert organizations. This led to concrete partnership efforts for the acquisition (or implementation) of projects or grant funding to develop innovative projects like the Employment Fund in Nepal, which utilizes the results-based finance approach.
Strategic partnerships with partner nonprofits from the Alliance2015: Helvetas, together with its partner nonprofits from the Alliance2015, are jointly attending Impact Week, an impact investor event that will discuss and promote the roles and expertise of nonprofits. The aim is to broaden the network, form new partnerships and change the perceptions of where nonprofits fit in this space.
Creation of a community of practice: To further build our internal capacities and create a common understanding of the topic, an internal community of practice currently works on collecting information, sharing and pro-actively creating opportunities for the organization to become engaged and to develop and refine our position.

Helvetas supports opportunities for impact finance to leverage resources and to accelerate the growth of micro, small and medium enterprises (MSMEs) by building strategic networks with Swiss-based and international institutions. To achieve this, we offer our technical expertise and provide access to relevant stakeholders through our well-established worldwide networks.

But our work goes beyond making connections, shaping policy and advocating for a more inclusive impact finance ecosystem. Helvetas is also implementing numerous projects that directly address the biggest challenges we’ve seen during our years of working in this space: underserved groups’ lack of access to and the availability of finance.

For example, in Ethiopia, women in the Sidama region are often labelled by traditional banks as "unbankable." They are perceived to be high-risk clients due to their lack of collateral. Banks prioritized other clients over these women, excluding them from formal financial services and leaving them with few options to secure funding for their businesses.

The UP-Women Project, a four-year initiative being implemented by Helvetas, launched a loan guarantee fund with one of the major banks in the region. The fund encourages the bank to work with this underserved group and, ultimately, to address the systemic barriers that prevent women from accessing credit and loans. In addition to strengthening access to finance, the project aims to create employment opportunities and secure decent incomes for 3,500 women and girls by engaging them in short-term vocational skills trainings in male-dominated sectors. This innovative approach has opened the door for women entrepreneurs to access an established credit line and to start or expand their businesses.

We’re also shifting the narrative around the availability of finance in Peru. MSMEs in the country face significant challenges in accessing financing and financial services due to high interest rates, terms that do not align with their cash flow cycles and the limited availability of affordable financial products for long-term investment needs.

The SeCompetitivo program, a Swiss Cooperation-SECO initiative implemented by Helvetas, aims to improve the competitiveness of the private sector. In collaboration with local partners, the program launched the Capital Fund for Innovative Entrepreneurship – the first venture capital fund of funds in Peru. The fund’s goal is to increase access to venture capital for Peruvian startups and promote the development of the impact investment ecosystem. To date, 32 startups have benefited from a total investment of $30.1 million. Helvetas also helped to launch “Aliados de Impacto,” a local organization that promotes the development of the impact investment ecosystem in Peru by providing strategic guidance and facilitating opportunities between the different stakeholders, while serving as the Peruvian hub for strategic investment guidance and collaboration.

Both of these projects highlight the potential to grow entrepreneurs and small businesses’ role in local economies – if access to the private sector and its resources is established. Which is exactly where nonprofits come in. By using their contextual knowledge and trusted relationships, both businesses and investors can work together toward a fair and impact-oriented economy.

Exploring new funding pathways

Development cooperation mainly relies on individual donations and government funding, and therefore operates in a volatile environment that is often subject to global or local (geo)politics. To decrease these dependencies, diversify risks and increase efficiency in project implementation (e.g., by increasingly applying the results-based financing approach), it is crucial for Helvetas and our peers to further explore new business segments and test innovative approaches, such as impact finance-related instruments. Helvetas will continue to think outside of the box and strengthen our in-house expertise to leverage more private sector funding for development topics and increase impact with the funds available – all while working towards the overarching goal of closing the SDG funding gap.