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Competition Pumps Funds into a Novel Growth Industry

Last week, at a ceremony in Seoul, President Obama congratulated the winners of a competition that may not have caught the world’s attention like the Nobel Prizes or World Series but just might change the world.

Last week, at a ceremony in Seoul, President Obama congratulated the winners of a competition that may not have caught the world’s attention like the Nobel Prizes or World Series but just might change the world. The G20 SME Finance Challenge, launched by G20 leaders in June at the group’s Toronto summit, invited individuals and organizations to submit novel approaches to helping small and medium-sized enterprises(SMEs) blossom into businesses that are engines of growth and job creation. The competition—which promised financial commitments from an array of international donors to help the winners scale up their ideas—drew 350 inspiring entries from more than 20 countries. The 14 winners selected from that pool will now share more than a half a billion dollars from the United States, Canada, the Republic of Korea, the Inter-American Development Bank, and the Multilateral Investment Fund.

One of the biggest challenges that SMEs face is access to the financing they need to thrive and grow. To tackle this challenge, the G20 deployed an innovative approach that used the G20 reach and convening power to find the best solutions around the globe.  Funded by the Rockefeller Foundation and run by Ashoka’s Changemakers, the G20 SME Finance Challenge called on private financial institutions, private investors and companies, socially responsible investors, foundations, and civil society organizations worldwide to identify the best models of using public interventions to catalyze the deployment of private finance on a sustainable and scalable basis.

One winning model, submitted by the Entrepreneurial Finance Lab, was a low-cost screening tool  lenders can use to evaluate the risk of a potential SME loan without requiring the traditional evidence for creditworthiness that all too many entrepreneurs—especially women—lack.  Another winning entry, submitted by the Capital Tool Company, also targeted the challenge of SME risk evaluation: through a web-based network, the winning model aggregates suppliers’ knowledge of their SME clients—for example,  whether they have a history of paying their bills on time—to create risk ratings that can be shared with potential lenders. 

The winning submission from MFX Solutions focused on eliminating currency risk for international SME lenders by adopting a proven currency-hedging strategy pioneered in the microfinance industry.  And the Peace Dividend Trust submitted an innovative loan guarantee model aimed at empowering local SMEs to bid for donor procurement contracts in post-conflict or post-disaster economies.  You can learn more about these winning ideas and many more on the Challenge website.

The winning ideas will be scaled through a new global SME Financing Facility launched in Seoul by President Obama in partnership with Canada, the Republic of Korea, and the multilateral development banks.  The SME Financing Facility will be structured to accept funding from an array of different sources and to distribute funding in the form best suited to the winning proposals.  In some cases that may be grants for technical assistance or capacity building; in others it may be risk sharing or first-loss capital, mezzanine capital, or investment capital. To date, $528 million has been committed to the framework.

Scaling the winning solutions through the SME Finance Innovation Fund is just the most immediate of the many benefits that are expected to emerge from this novel Challenge.  Through the Challenge, the G20 has cultivated a rich community of innovative minds committed to the goal of developing creative SME finance models as the Executive Director of Ashoka’s Changemakers, Charlie Brown, said at Promoting Innovation, a summit on prizes and challenges hosted earlier this year by the White House and the Case Foundation, “the power of competition is not only to source new ideas, but to create partnerships and collaboration in some of the most unlikely and seemingly impossible situations.”

In other words, although this contest has ended, the innovation has just begun.