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By the time we got to Woodstock / We were half a million strong - Joni Mitchell, "Woodstock"

Well, there won't be half a million of us, but as Bill Baue noted in a recent CSR Wire article, the Social Capital Markets conference (2009 vintage) is quickly shaping up to be an important event for our generation of changemakers, investors, intrapreneurs, policymakers and innovators.  (His exact quote was "...[SoCap09] is quickly becoming the Woodstock for social entrepreneurs.")  NextBillion.net covered the event extensively last year, and we are pleased to be going back as a "Deep Channel Partner" (aka Media Partner).

The SoCap team has released a version 1.0 of the schedule and speakers, which deserve a close look.  Keynote speakers include

• Sonal Shah, head of President Obama's Office of Social Innovation;
• Alvaro Rodriguez-Arregui of IGNIA Fund;
• William Foote of Root Capital;
• Jed Emerson of Uhuru Capital Management

And many more.  The panel sessions also look promising, giving participants a deeper dive than a typical "social innovation 101" you would get at a less-focused conference.  Take a close look at the web site for all the details; you can even follow SoCap on Twitter, read their (excellent) blog, check out the Facebook page, etc.

Once you've done your diligence, take advantage of a 40% discount (!) that will expire July 8.  Use the code WEB40 to receive the special discount.

Francisco and I will both be at SoCap; will you?

Occasionally one encounters a novel application of a familiar technology.  In this case, it's blogging.  David Roodman, fellow at the Center for Global Development and architect of the Commitment to Development Index, is writing an open-book blog about microfinance.  He drafts a chapter, then posts it for comment and critique.  Mr. Roodman shared the introduction to his book on February 17th and has since authored nine additional sections.  Although the work looks substantially complete, there is still a tremendous opportunity to contribute to its evolution.  (Talk about opportunities for co-creation!)

What I appreciate most about Mr. Roodman's approach (apart from his willingness to share the manuscript-in-progress), is his clear and thoughtful use of a framework to couch the discussion.  The purpose of the book is to explore the impact of microfinance from three primary perspectives : development as freedom, development as institution-building, and development as measurable impact.

Development as freedom, a concept introduced by Amartya Sen, refers to the ability to exercise one's sense of agency and maintain control over one's life.  With respect to microfinance, the question is whether (and under what circumstances), microfinance increases or limits the freedom of those who use it.  Creative destruction, described by Joseph Schumpeter as the dissolution of the status quo caused by disruptive innovation, is the underpinning of development as institution building.  From this perspective, the relevant query is whether the evolution of financing for MFIs has improved the state of the field.  Finally, development as measurable impact explores the debate over whether social impact can be meaningfully measured. In other words, how do we know if microfinance is really helping the poor?

Editor's note: A blog post written by Manuel Bueno, published yesterday on NextBillion.net, addresses this exact question. 

Given the extreme contrast between microfinance success stories and those of disaster and indebtedness, a balanced interpretation of these accounts and a rigorous exploration of the truth is quite welcome. Check out David Roodman's Microfinance Blog here.   

Happy Reading!

Microfinance in its simplest form involves extending loans to a group of borrowers (usually called self help groups) who agree to help each other by means of group savings and informal support. The typical self help group consists of 10 to 20 people who meet regularly to discuss social issues and activities and deposit their savings in a joint bank account. Once enough savings have been accumulated, group members can apply to internal loans within the group or apply for loans through a commercial bank.

Even though microfinance is estimated to have directly reached 100 million customers in 2008 (for more details see my previous post) there is still plenty of debate about whether it has a significant impact on the lives of the poor or not. There are many good reasons why it may benefit or harm the people it tries to help. In theory, microfinance self help groups are better at allocating resources because it takes advantage of  more comprehensive local information regarding local needs and lower monitoring costs, thus mitigating challenges like moral hazard and adverse selection. Therefore transferring resources to self help groups should result in local empowerment and efficiency. On the other hand, those resources devoted to the self help group may be appropriated by local elites. Additionally, if these resources are channeled through institutions parallel to local governments they may undermine rather than strengthen local capacity.

Continue reading this article

Financial inclusion has long been a challenge in India, where bank transactions are mainly urban based and people living in rural areas rarely even have a bank account. Financial inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low-income groups.  The Reserve Bank of India’s initiative to reach rural India by extending banking services through Non-Governmental Organizations (NGOs), Micro Finance Institutions (MFIs) and other Civil Society Organizations (CSOs) has been a welcome step forward.

A Little World, a Mumbai based organization is one such organization working to connect rural India with mainstream financial institutions.  In less than ten years, A Little World has expanded into more than 20 states in the country and developed partnerships to run the banking operations of over 25 banks.  Recently, the company was awarded the The Sankalp 2009 High Impact Award for Highly Scalable Social Models at the Sankalp Social Enterprise and Investment Forum.

During my internship here in the company, I recently had a chance to speak to Anurag Gupta, Innovator, Founder and Chief Technology Officer of the company and also the Director of the company's Zero Mass Foundation.

NextBillion.net:Tell us a little bit about yourself - where do you come from, your educational/professional background.

Anurag Gupta: I come from the state of Uttar Pradesh in India and studied architecture from the School of Planning and Architecture, Delhi.

NextBillion.net: Can you provide us with some background on A Little World?

Anurag Gupta:  A Little World is operating micro-banks in rural and remote areas of India, which have traditionally struggled with financial inclusion. We are spread in over 20 states working with local governments and 25 Banks, including State Bank of India, the largest in this regard, to carry out transactions and other financial activities in those areas. As a business correspondent for these banks, we enroll new customers and follow up on transactions by utilizing Bank-in-a-Box methodology. The enrollments and transactions are authenticated by using a finger print scanner, which also serves as a printer for the receipt of transaction details. The operators, 98% of which are women, also have a smart-card-enabled mobile phone with them to type in the details of the transaction. GPRS technology is used to communicate between the mobile phone and the finger print scanner. At present, we have 8,200 outlets in the country with 24,000 trained women operators running them.

NextBillion.net: What ideas led to it's inception? What was your inspiration to start this venture?

Anurag Gupta: There was a clear need for a domestic payment system that was affordable despite the amount involved in the transaction. Credit cards, for example, have this inherent challenge because it is infeasible for all the parties involved to approve transactions at very low amounts. In 2003 we started  mCheck which is a mobile payment platform that could make and receive payments securely and instantly over any distance. After the adoption of this technology by the State Bank of India, Airtel, and others, we sold off this business model in 2006. On the 7th of November 2007, we created the first outlet for Zero Mass Foundation in Mizoram to work as an implementer of the Social Service Payment System.

NextBillion.net: What’s the biggest challenge you face as a Director?

Anurag Gupta: It has always been difficult to raise investments to scale a business model like ours. Dr, Sayed AR Zaidi,former head of the Philosophy department at University of Delhi and  one of our investors, has been the soul of the company although he exited the company after we sold mCheck. Without his support all this time, the company would not have been in existence.

NextBillion.net: What’s the one thing you never would have imagined when you started the company, but is obvious to you today?

Anurag Gupta: When we started in 2000, the proliferation of the mobile phone as a tool we could utilize was definitely not at the levels that it is today. We never thought our company would be based around the cell phone to this extent and that now we would be creating a whole eco-system around it. At the inception, we were visioning a model based on stand-alone terminals rather than using mobile phones. Now, the thought only of the terminals seems so obsolete.

NextBillion.net: What was the most important thing you read in college relating to your work today?

Anurag Gupta: As an architectural graduate, I realized that we need to think openly in three dimensions. It is more flexible and gives you a much better understanding of a challenge. Also, the company and its operations are an architectural model in itself and so the principles are applied in an organization context as well.

NextBillion.net: What does Base of the Pyramid mean to you?

Anurag Gupta: For me, Base of Pyramid means the kind of people we are serving - the underprivileged and poorest in the income pyramid. A 95 year old widow with a mere pension of INR 200 month, a physically handicapped staying below the poverty line and millions others. Our business model is based on improving the quality of their lives and making it as sustainable as possible in the process.

NextBillion.net: Where do you see the company to be in next 18-24 months?

Anurag Gupta:  We vision to make this company the largest microbanking organization in the world. We hope to reach a level of 100,000 outlets serving a base of over 50 million customers in the process.

With this long overdue post I want to direct your attention to an innovative, relevant and icreasingly active platform called Akvo.org. Its topic area is one of obvious relevance to the NextBillion audience: drinking water and sanitation in the developing world. It's overdue because I learned about Akvo quite some time ago, back when I was working with Al Hammond, Jim Koch and the Global Social Benefit Incubator team on a review of community-scale, enterprise based approaches to these challenges. I choose to write about it today to join them in announcing the investment that of Rabobank recently made in the project and to finally put a check next to it on my list!

Akvo's platform serves three main purposes: First, it facilitates the flow of funds and resources to water and sanitation projects in the developing world; in Akvo, you'll be able to find hundreds of projects in many countries with detailed descriptions of their funding needs, executing organizations, etc. Once you donate to the project of choice you'll be curious to see how it performs and grows over time, of course. Well, project performance metrics is Akvo's second pillar of work through a methodology called Really Simple Reporting. Finally, through Akvopedia, it facilitates the transfer of skills and knowledge among existing projects and basically anyone interested in learning more about the different technologies and approaches that address the challenges of water and sanitation. 

Akvo is a fantastic resource and it's only beginning to gain traction. Surely, it will continue to gain strength, relevance and visibility in years to come. Nonetheless, there are a couple of things I would like to see happening in the site as it continues to mature. The first is a shift from donations to investments in these projects, or at least that the choice is made available for users to make. It would be interesting to see how different projects (whose goals are ultimately the same) compete for resources in a single marketplace that houses both "pure philanthopy" and social investment alternatives. The second is that the Akvopedia would be greatly enriched if all the entries included two examples: one of "where it has worked" and another one of "where it hasn't worked" with an explanation of the whens, hows and whys.

Given the open nature of the platform, both suggetions are not for Akvo staff to take on but for users to propose and submit. That said, go ahead and explore this great resource. NextBillion will continue to report on the progress of the "open source for water and sanitation" as it continues to grow and create change.

Intellecap launched Beyond Profit, a print and online magazine dedicated to the businesses, people and ideas within the social enterprise space, on April 28. The inaugural issue was released at Sankalp 2009, South Asia’s largest social enterprise business and investment forum.

Intellecap is a social business advisory firm that provides services to the for-profit development sector in areas such as microfinance, water, energy and education. The firm also publishes Microfinance Insights, a magazine that serves the knowledge needs of the growing microfinance sector.

Both of these publications are offering a free, 1-year e-subscription. Find out more on the Beyond Profit and Microfinance Insights websites. The offer ends June 30.

Read more about Beyond Profit on Next Billion.

"I'm going to a conference this week..."  This phrase generally fails to inspire, especially after you've been to a few keynote-panel-keynote-lunch-panel-panel-reception type events.  There are exceptions - TED and Pop!Tech both stand out in this regard - but the average conference is usually valued more for the off-hours networking than the content itself.

For the base of the pyramid sector, the trend of boring conferences is beginning to reverse itself, albeit slowly.  First we had the Social Capital Markets conference in 2008, which featured, on its third day, an "unconference" format - where participants planned and hosted panels of their own choosing - that was universally well-received.  Earlier this month, the Cornell Global Forum pushed boundaries by asking delegates not to sit in long plenary or panel sessions but rather to break into deep-dive working groups.  Both formats value active participation and break down the speaker/participant glass ceiling - all in service of getting something done (beyond talking, of course).

In this vein, I am really excited to learn about a truly innovative "non-conference" being planned by a group including NextBillion allies Emeka Okafor, Erik Hersman and Nii Simmonds.  Their Maker Faire Africa event, which will be held in Ghana this August, is no-talk, all-action.  The 3-day event will bring together roboticists, hobbyists, blacksmiths - MAKERS - to jam collectively on home-grown solutions to local problems.  In Emeka's own words, "we want to spark an interest in fabrication - make it sexy, if you will."

As if Emeka, Erik and Nii weren't heavyweights enough, the Maker Faire Africa guys are working with the grandmaster of local, appropriate technology - Amy Smith (another NextBillion ally).  Amy's International Development Design Summit will be taking place in Ghana this August, which will allow her group to interface with the Maker Faire.

Bringing home the spirit of this non-conference, Maker Faire Africa is not a ticketed event with flashy speakers that fly in and out the same day.  In fact, it couldn't be further from what we think of as a conference - it's free, it's open, and you're encouraged to bring your prototypes so that everyone can tinker along with you.

We'll be sure to report back on Maker Faire Africa as the event gets closer, but the idea of it is incredibly encouraging.  Yes, talk - discussion, research, writing, etc. - is important.  But time and again, we leave conferences without a tangible call to action.  I applaud the Maker Faire Africa team for pushing the boundaries of what a conference is all about, and keeping the focus on putting ideas into action.

Most of you are probably familiar with the story of Dr. Mo Ibrahim, the British-Sudanese entrepreneur who built Celtel (now Zain) into one of the most successful telcos on the African continent (and beyond).  Then you can imagine my surprise when the following email landed in my inbox:

Dr. Mo Ibrahim, founder of Celtel and a 2008 Time 100 honoree, will be on campus next week as the 2009 Bartels World Affairs Fellow.  Dr. Ibrahim is one of Africa's most successful businessmen and created the Mo Ibrahim Foundation in 2006 which           awards the Achievement in African Leadership [prize].

I have been fortunate enough to secure a portion of Dr. Ibrahim's time to attend Monday's class.  If you are interested, I would love to have you join us for a continental breakfast from 8:00-8:40 am, followed by discussion from 8:40-9:55 am.

Unbelievable-I couldn't believe my good fortune.  Never would I have imagined that I'd be within twenty feet of an entrepreneur of Mr. Ibrahim's caliber.  Not only is African telecom one of my primary interests, I'd been enamored with the CelTel/Zain story since completing a strategy project about its rival, MTN.  Furthermore, I was intensely curious about Mr. Ibrahim's motivation for creating his foundation. 

On the surface, his two careers, telecom entrepreneur and democracy advocate, seemed rather disparate.  However, (as I was recently reminded), the role of government is critical to the success of business in Africa, particularly when it comes to infrastructure.  Given the critical role that government officials play in the distribution of licenses, it's little wonder that he linked the two.

Those of us who attended this session were treated to an Inside the Actor's Studio-style interview conducted by Mark Milstein, Director of the Center for Sustainable Global Enterprise.  Please read on for a smattering of what we discussed.  (Note: This is not a verbatim transcript.  It's just a summarized excerpt of a much longer conversation.)

Mark Milstein:
How did you spot an opportunity for telecom in Africa?

Mo Ibrahim:
People thought that Africa was too dangerous.  People didn't want to work in Uganda because of Idi Amin despite the fact that he'd been gone for more than 15 years.  Cynicism and romanticism co-existed.  Both are true, but the larger picture is also true.  For example, everyone knows about Mugabe, but this is an incomplete, inaccurate picture.  Life can be as boring in Africa as it is in Ithaca-people get up, go to work, etc.  (Who knew Mo Ibrahim had such a wry sense of humor!)

Mark Milstein:
Why was the success of the mobile phone so dramatic in Africa?

Mo Ibrahim:
First, there was a high degree of equity in the phone call and secondly, the market was defined.  There were limited ways for people to communicate; often, they had to meet in person.  In Kinshasa, people used messengers.  If you didn't live in the same town, it could take ten days just to tell your mother that you were engaged.

Mark Milstein:
Did you realize that cell phones would be so powerful?

Mo Ibrahim:
They definitely exceeded our expectations.  They are essential for trade and education and are a tool for democracy and openness.  Zimbabwe and Kenya represent a great victory; people stopped elections from proceeding [due to their ability to communicate about what was going on].

Mark Milstein:
What quality made it difficult for companies to learn how to operate successfully in this space?

Mo Ibrahim:
Business people who were shifty and behaved illegally made things challenging.  People warned us that it wasn't possible to do business with integrity.  But at CelTel, any check for more than 30,000 pounds had to be signed by the board.  This was our silver bullet because the clout of the board discouraged bribery.  At the end of the day, the level of transparency and quality of corporate governance enhanced the value of the company.  When we sold the company we received 8.5 times EBITDA.  In fact, Celtel's story is taught at Harvard Business School as an example of how strong corporate governance attracts a premium.

Mark Milstein:
How did the state of leadership help you determine what markets to enter?

Mo Ibrahim:
We looked beyond the condition of the market to governance.  We've paid for licenses but then walked away.  We delayed entry in another place due to corruption.  Don't let short term gain push you to do something.  In the end, it will harm the value of your business.

Mark Milstein:
What advice do you have to give for people starting business with a social value?

Mo Ibrahim:
Any business has social value, otherwise it's unethical.  For example, prostitution and gambling have no social value.  Creating jobs and looking after the community are important.  A business cannot thrive in a community that is failing.  Social value should not be invoked as an excuse to do lousy, unsuccessful business.  Mixing the two is a recipe for disaster.  The sole purpose of business is to generate value generally, not just the kind that is social in nature.  As long as the company is ethical, there is social value.

Mark Milstein:
Why decide to promote democracy?

Mo Ibrahim:
Democracy is terrible, but it is the least evil system we know.  Democracy, transparency, good government, rule of law, and strong law enforcement are all very important. 

Mark Milstein:
A society of entitlement compounds the likelihood of success for the wealthy. 
Doesn't the Prize for Achievement in African Leadership give money to the already wealthy?

Mo Ibrahim:
The first part of the statement is correct, but we we're not dealing with wealthy, crooked people.  Once you finish the job as head of state, you leave your means behind.  Tony Blair charges $500M per speech and $2M to sit on Merrill Lynch's board.  But many leaders can't rent an apartment in the capital where they were living because they can't afford to.  Also, we're not paying people excessively.

Well, that's all she wrote.  Not surprisingly, the dialogue during this session was much richer than I could convey in this excerpt.  Of particular note was the James Lipton-like approach to the initial round of questions.  Thanks to that, I now know that Mo Ibrahim likes the sound of babies, admires Madame Curie (complete with poster on the wall), and detests hypocrisy.  How's that for a 360 degree view of a leader?

Last October 2008 Stuart Hart visited Erasmus University in Rotterdam as a committee member of the PhD defense of Martin Klein from the Erasmus School of Economics at Erasmus University.

Martin has now founded ‘Business for Development’, a BoP business development company focused on stimulating founding new BoP businesses in partnership with other organizations. Unfortunately his webpage does not have much information yet, but parts of his doctoral thesis can be freely downloaded. It is indeed an important document to take into account; while summarizing what we know about starting and developing businesses at the BoP, it also develops this body of knowledge from the perspective of both BoP practitioners and academics.

Martin's thesis examines the most common postulates of what it means to work at the BoP level thanks to an extensive survey of 143 BoP firms working in 105 countries, and prods into what exactly are the challenges and opportunities that these firms encounter. In this line and among other findings, he shows that there are several issues which are constant along the lifetime of a BoP business, such as external corporate governance and challenges related to developing a strong market position. Other issues were perceived to be relevant at some points in the growth cycle of the business, but not in others. For example, the struggle to remain profitable or finding ways to keep on growing only became important concerns after some other operational milestones had been passed.

Martin also develops a management support model for developing profitable pro-poor business models by incorporating additional variables to the business model. These variables provide criteria for the development of profitable pro-poor business models and may be a factor in explaining why some firms succeed at the BoP while others fail.

Furthermore and not surprisingly, many of the challenges and opportunities found by these firms are very much context-specific. Thus a firm has to be willing to adapt as much as possible to the local conditions in order to thrive. Here, Martin makes clear that often BoP businesses are often asked to be contrasting things. For example, on the one hand, BoP businesses have to become highly specialized and embedded within the local markets, while also having to remain flexible to gain scale and exploit other local markets.

Martin here finds that robustness has a larger effect on financial performance than does flexibility. He also finds that social value creation improves financial performance whereas adopting environmentally friendly practices does not seem to have such a positive effect. As a result, he suggests that maybe additional incentives and monitoring mechanisms are needed at for BoP ventures until it pays off financially to be environmentally friendly.

In my opinion, Martin also sheds light into some interesting tensions that underlie surviving in these markets. For example, if a firm is highly specialized to the local market, then what learning is most relevant and applicable to other BoP businesses? Martin argues that this is a false dychotomy. BoP businesses have indeed much to learn from each other, not less thanks to the soft skills acquired in their management. He vouches in favor of finding ways to stimulate more connections among businesses to avoid “reinventing the wheel” and to share insights and lessons learned.

Another important tension is the clash between formal and informal economies. BoP businesses belong to the formal economy, but the local markets in which they are embedded are most often highly informal. To build the reciprocity and trust required to succeed in these markets, BoP businesses should tap into the entrepreneurship and customer knowledge that underlies informal economies. At the same time, working in the formal market facilitates cooperation and enables growth by reducing market imperfection and transaction costs. Still, finding the ideal middle ground is not an easy task.

Martin finishes off by pointing out areas of future analysis. Previous research has shown that NGOs may be particularly valuable partners for BoP businesses, but it remains unclear how exactly or in which cases they may be particularly relevant. Moreover, a full assessment on the long-term contribution of BoP initiatives to poverty alleviation is yet to be done.

I arrived back to the cozy office of Global Easy Water Products (GEWP) with Pratyush Pandey, the company’s Managing Director, after a long day of visiting farmers on the outskirts of Aurangabad, Maharashtra.  These farmers were customers of GEWP’s “KB Drip” irrigation products.  After countless visits with GEWP over the past two years, one thing has become clear to me: there is no lack of demand for KB Drip.  To date, hundreds of thousands of farmers have seen an immediate benefit in their yields and their incomes.  This puts GEWP at such an exciting point of growth.  The company is distributing in seven states across India and has doubled its annual sales in 2009 – and is likely to do so again in 2010. 

Despite the growth projections, the reality for an agriculture business like GEWP is a strong seasonality of sales.  Between February and June, GEWP’s sales skyrocket as farmers are planting pre-monsoon.  This means that GEWP has to build up significant inventory in the off-season in order to meet peak demand.  Even more, if GEWP wants to pay suppliers up front in order to minimize costs and to extend credit to dealers in order to stimulate sales, the company requires significant cash reserves to cover the spread (i.e., from the time GWEP pays suppliers up front to the time they receive cash from sales).  For many small and medium enterprises (SMEs) in manufacturing, distribution and retail, meeting this “working capital requirement” is the crucial bottleneck to scale.  And I have been extremely disappointed by the risk-aversion of the Indian public and private banking sector to address this need and opportunity.

Before we get deeper, let me first take a step back and explore the demand for SME financing: In India, Acumen Fund’s portfolio of twelve companies is among a pool of more than 11 million SMEs.  Small-scale industry (SSI) comprises around 40% of India’s industrial production and manufactured exports and has historically recorded above-average growth rates—not to mention that the SME sector employs more than 28 million Indians, second only to agriculture.  This is not an Indian phenomenon.  Globally, 99.7% of all enterprises in the world are SMEs.  (source: Department of Scientific & Industrial Research)  Access to finance ranks among the top barriers to growth for SMEs.  Further, while credit to SMEs is always tricky, working capital is an added challenge, since many distribution companies lack fixed assets to be used as collateral.

As active investors, Acumen Fund is working with GEWP and a number of other portfolio companies to address their needs for working capital.  The ideal solution is to access an affordable line of credit from a reputable bank and, by doing so, establish the company’s credit record.  Commercial banks are much better placed to scale with the financing needs of these fast-growing companies.  Five years from now, GEWP will require a credit limit far greater than any social investor can provide on its own.  Moreover, five years from now, GEWP (as a more profitable and successful enterprise) will hopefully not require a social investor and should start to engage with the commercial banking now in order to plan for that trajectory.

So, we began knocking on doors.  We started by reaching out to agencies within the Government of India that had established funds to commercialize appropriate domestic technology—such as drip irrigation for Indian farmers.  Entities like the Department of Science and Technology (DST) and the Department of Scientific and Industrial Research (DSIR) are offering term loans at 2-5% interest.  After a few conversations, it became clear that “commercializing” a technology can be viewed quite differently.  I would define “commercialization” as proving that profitable businesses can be established along the value chain.  DST defines “commercialization” as the first unit sold out of the laboratory.  There is clearly a role for their capital in India, but they are not addressing the needs of technologies on the brink of viability.  I guess that is the role of the banks.

Next, we approached the public sector banks like the Small Industry Development Bank of India (SIDBI), which was established to “empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development.”  This has been a tremendous lesson in traversing bureaucracy.  Before heading to the office of the SIDBI General Manager, my colleague, Uma and I did research on working capital loans from SIDBI.  We printed a page from the website that stated SIDBI’s expansion into working capital.  You can imagine our surprise when the General Manager unequivocally told us that SIDBI financing is limited to term loans for fixed assets.  Hmmmm.  On top of that, he emphasized that the National Bank for Agriculture and Rural Development (NABARD) would turn us down for the same reason.  Bankers want to invest in capital equipment, not trading.  We will keep pushing on this front, but in the meantime, we had to move on to the next target.
 
From there, we initiated conversations with a number of commercial banks and knew from the get-go that this would be tough—especially after one banker told me that they define “small businesses” as companies with revenues of R.50-150 crore (that is USD $10-100 million)!  The commercial banks look at SMEs and see high transaction costs and high risk.  Maybe I think about risk too much like a venture capitalist and not enough like a banker.  So far, the Indian commercial banks that we talk to want a 100% guarantee, usually as company cash reserve or personal promoter guarantee.  This may be the only option for getting commercial banks comfortable with the credit-worthiness of a company like GEWP.  It is far from an ideal option.  We have not given up on the mainstream banks.  We will continue our current conversations and push for innovative thinking. 

The Reserve Bank of India has strong mandates for “priority sector lending,” (source: Reserve Bank of India) which requires both public and private banks to invest a certain percentage (currently 40%) of their portfolio in sectors like agriculture, SSIs, small business, microfinance, housing and education loans.  Moreover, there are strict penalties for non-compliance, which include being forced to subscribe to low-interest bonds from NABARD to supplement the shortfall. 

I am not an expert on RBI’s priority sector lending policy and I’m trying to get up the learning curve (I would of course welcome input from Indian bankers on how they manage the priority sectors into their portfolio).  But, I want to push the question that, with such high priority sector lending requirements, why is RBI still highlighting the enduring lack of credit to SMEs (See: May 04, 2009 circular).  Are there enough financing opportunities in agricultural processing and housing finance to crowd out small businesses?  Or are small businesses simply not considered creditworthy due to fledgling financial systems, thin management and new markets?  We welcome any input from our community, as Acumen has just begun to look at India’s priority sector lending more rigorously. 

In sum, government agencies want earlier stage companies, public-sector banks want to lend for fixed assets, commercial banks want a 100% guarantee.  Where does this leave us?  The unfortunate reality may be that early-stage companies must finance working capital through equity, prove that their model is viable, and grow to a significant enough size to raise debt.  If that is the case, what is the tipping point, in terms of size of business performance, after which banks really will gain comfort?

I know that Acumen Fund is not the only entity grappling with this.  I would like to commend IFMR Trust for its new initiative to raise an SME debt fund, and we are eagerly waiting for that vehicle to be up and running.  In addition to independent debt funds, the scope of demand for SME financing will require a number of alternative structures. 

We have been approached by a numerous foundations recently that want to use their grant capital to spur social enterprise.  My advice: instead of giving grants to entrepreneurs to seed financial viability (which is subject to an inherent contradiction—grants to incentivize financial sustainability), think about leveraging your grant money to guarantee low-cost debt to SMEs or social enterprises.  Not only will your philanthropic dollars address a vital unmet need, but these dollars will stimulate an institutional shift where the banking sector can increase its risk tolerance for SME finance.   (The next step will be to reduce transaction costs for small loans, so banks can further reduce high interest rates.)

I welcome any challenge on the points above, any advice for small businesses in India and beyond, and I hope we can prompt a rich discussion that gets us closer to busting this bottleneck of scarce SME debt—very specifically for working capital—to companies like GEWP.