In 2007 Social Funds existed in more than 45 countries, predominantly in poorer and smaller developing countries that receive significant official development assistance. However, a Social Fund also exists in Romania, a country that has recently joined the EU, as well as in many other Eastern European countries. Probably the largest Social Fund is the Pakistan Poverty Alleviation Fund (PPAF) with a resource base of US$ 500 million. Social Funds have channeled close to US$ 5 billion of World Bank funding in Africa alone between 1999 and 2005 and have channeled more than ten billion dollars from all donors and governments' own resources over the past 20 years.
The first Social Fund was created in 1987 in Bolivia. During the 1990s Social Funds spread quickly throughout Latin America and Africa with the intellectual and financial backing of the World Bank and other donors.
The first generation social funds were created to serve as short-term safety nets to soften the impact of structural adjustment policies on the poor, which was mainly achieved by providing temporary employment. Second generation social funds have adopted more explicit institutional strategies aimed at empowerment and capacity building of communities as well as local governments in the context of decentralization.
Social Funds were created as temporary agencies that would be phased out once capacity of line agencies had been strengthened. Some Social Funds, such as in Ethiopia, are now in the process of being phased out, and others, such as in Honduras, are supposed to be closed down by law a few years from now. However, many Social Funds may well remain permanent institutions fulfilling important functions that line agencies may not be well set up to perform.
Some of the benefits of Social Funds have been their ability to better reach poor constituencies, to reduce corruption and to introduce innovations. Social Funds have pioneered community-driven development (CDD), whereby community-based organizations (typically representing a few hundred people or less, often in rural areas) administrate funds themselves and choose where to invest them, thus increasing transparency and accountability for the use of funds. This approach also builds the self-confidence and capacity of local communities. It also helps projects to better meet local needs.
Social Funds have been criticized for displacing or weakening existing institutions such as sectoral ministries and departments, particularly since they often - but not always - offer salaries that are significantly higher than in the public sector. Another criticism is that there has been no exit strategy to phase out Social Funds, although they were intended to be temporary institutions.
In 2002 the World Bank carried out the first systematic, cross-country evaluation of Social Funds. The evaluation covered social funds in Armenia, Bolivia, Honduras, Nicaragua, Peru, and Zambia. Investments had been concentrated in education, health, water and sanitation sub-projects. Each evaluation reviewed the social fund’s poverty targeting, sustainability, welfare impacts, and costs. One of the evaluation's main conclusions was that the Social Funds evaluated were indeed effective at reaching the poor and extremely poor communities and households, something that had been disputed given allegedly limited capabilities of poor communities to manage funds and execute sub-projects.