DPhil (PhD) candidate in Economics at the University of Oxford, and Skoll Centre affiliated researcher, Muhammad Meki, and his colleagues describe their early research into launching a microequity programme in Indonesia for microentrepreneurs in collaboration with Allianz.
In many developing economies, a significant proportion of households derive their primary income from microenterprises involved in retail, light production of goods such as clothes, trade, and smallholder farming. Individuals who operate and work in such small firms tend to be poor; as such, improving their performance offers the potential for wide-scale poverty reduction.
There has been much talk about the potential for microfinance to lead to such poverty alleviation, however recent rigorous evaluations of microcredit have revealed more limited impacts. Reflecting on the evidence, it may be more appropriate to view microcredit as a way to ‘grease the wheels’ of development, rather than as a ‘silver bullet’ for transformational change (Banerjee, Karlan, and Zinman, 2015). Recent research also suggests that to help entrepreneurs better manage their enterprise, personalized approaches like consulting and mentorship can have more significant benefits than generic business training programs (Karlan and Valdivia, 2011; McKenzie and Woodruff, 2016; Valdivia, 2015; Bruhn, Karlan, Schoar, 2018; Brooks, Donovan, and Johnson, 2017).
First TNF investee and first graduate to mentorship phase — fish cake producer.
Since a key part of economic development is the movement from having most people working in small enterprises, to working as employees in larger, more productive enterprises, some experts believe that we should focus more on the small set of ‘transformational’ entrepreneurs rather than on the large group of ‘subsistence’ entrepreneurs (Schoar, 2010). Even the aforementioned microfinance studies showed that while microcredit does not generate large impacts on average, it can provide a significant boost to relatively more successful entrepreneurs (Banerjee, Karlan, Zinman, 2015; Meager, 2016).
TNF investee — broilers and gas cylinders seller.
Adding microequity to the picture?
Equity-based financing may be an alternative way forward for transformational entrepreneurs, since it can provide them with a more flexible form of finance that is better suited to the needs of a growing business, especially as it often comes with personalized support from investors to overcome the unique business challenges they face. While equity financing has the potential to grow rapidly in emerging markets, especially with developments in financial technology and the digital economy, the minimum financing amounts tend to be well beyond the needs of many grassroots entrepreneurs. What they may need is a more nuanced form of equity-based financing, tailored to microenterprises: microequity.
Lembaga Demografi (LD) enumerator interviewing TNF investee.
Trust Network Finance
With the intention of exploring the potential for equity-based financing for microenterprises in Indonesia, Allianz Indonesia has embarked on a microequity pilot project near Jakarta called ‘Trust Network Finance’ (TNF). The program involves 4 phases:
A selection phase in which microentrepreneurs are provided with a small initial amount of interest-free financing for their informal business, which increases if they repay successfully and share some of their profits, i.e., if they show characteristics of ‘transformational’ entrepreneurship;
A mentorship phase where selected entrepreneurs are appropriately matched with mentors for personalized business development advice. Mentors are incentivized to invest their ‘sweat equity’, which will be formalized as a 10% ownership share in the enterprise at the third phase;
A formalization phase in which entrepreneurs undergo formal business registration, and TNF and the mentor take formal equity stakes in the business;
A graduation phase, in which TNF reduces its ownership stake, by selling to the owner or an external investor and using the sales proceeds to refinance the program.
As entrepreneurs graduate through the phases, they gain the right to recommend new entrepreneurs for the program and even become mentors themselves, building up the ‘trust network’.
LD enumerator interviewing TNF investee
Some preliminary evidence on this new approach
TNF has recruited approximately 150 clients since the pilot started in June, 2016, with the most advanced participants now having advanced to phase 2. In late 2017 we surveyed 80 clients, with the aim of learning about what kinds of people were joining TNF and what attracted them to join.
Clients tend to like TNF, seeing it as a unique product;
Client understanding of the later phases of TNF is relatively low on average, which likely reflects the relative complexity of this unfamiliar venture capital-like model, compared to conventional microcredit;
There seem to be two groups of clients in the pilot: (i) a (larger) group of less dynamic entrepreneurs, who mostly see TNF as a convenient way to get operational financing for their enterprise, and are more likely to leave the program during the selection phase, and (ii) a (smaller) group of more dynamic entrepreneurs, who are relatively more attracted by the opportunity to reach the mentorship stage;
Many clients in this majority-Muslim nation see the interest-free TNF product as complying with Islamic law, and this was a very important factor in them joining.
These early results are promising, and provide some guidance for TNF as it scales up. Perhaps the network of clients can be harnessed to better identify and target the transformational ‘diamonds in the rough’, who can use TNF to become successful generators of wealth and employment.
The research has been funded by the Department of Foreign Affairs and Trade (DFAT), Government of Australia, through a core grant to the Abdul Latif Jameel Poverty Action Lab Southeast Asia (J-PAL SEA). The views expressed in this publication are the authors’ alone and are not necessarily the views of the Australian Government, J-PAL SEA or other partner organizations. We thank our colleagues at J-PAL SEA, and the Demographic Institute at the University of Indonesia (LD UI), for their support in implementing the research. We thank the team of Trust Network Finance at Allianz Indonesia for their support on this research.
Muhammad Meki is a PhD candidate in Economics at the University of Oxford. He is interested in the effect of equity-like financial contracts on the investment and growth of microenterprises in developing countries.
Simon Quinn (@simonrquinn)is an Associate Professor of Economics and a Deputy Director of the Centre for the Study of African Economies at the University of Oxford. Simon’s research interests lie primarily in the study of firms and development.
Russell Toth (@russell_toth) is a Senior Lecturer (Assistant Professor) in the School of Economics at the University of Sydney. He is a development microeconomist, with primary research interests in the development of the private sector in developing and emerging market countries.
Continuing our series of posts by our University of Oxford students attending the Skoll World Forum, ampouleMark Hand and his colleagues give us their take on an introduction to Social Entrepreneurship. As Mark says, doctor “happy enterprising!”
“Social Entrepreneurship,” according to one definition, “strives to solve social problems at a systemic level using innovative, sustainable, scalable, inclusive and measurable approaches.”
Confused about social entrepreneurship? You're not alone. -Image by Debbie Levey
In the 1980s, Ashoka Foundation’s Bill Drayton started using the phrase social entrepreneur to describe the people he funded to fix the world’s problems. Thirty years later, we use the phrase (and its sister, impact investing) to encompass nearly all novel do-goodery. The result is that it takes a couple of years working in social entrepreneurship or impact investing before you can get a grip on who’s who and the various meanings that different players attach to the same words. And the upshot is a clear division between insiders and outsiders. This keeps insiders’ jobs safe, I suppose, but it also prevents a lot of smart people from contributing to some of the coolest work on the planet.
So, in an effort to demystify the world of social entrepreneurship and impact investing, here’s a primer edited from a post written during the 2012 Emerge Conference at Oxford. If you’re a veteran, you’ll recognize all these names–and probably roll your eyes at how often the same examples are trotted around stage. If you’re new, we hope this can be a useful starting point.
Why Should We Care About This Social Entreprenonsense?
If you’ve gotten this far, presumably you are already interested in social entrepreneurship. There’s good reason to be. If you’re an entrepreneur, you’ll be competing for funding and spots at commercial incubators like Y Combinator with social entrepreneurs that have a head start on a compelling, convincing pitch. If you work at a nonprofit, you’ll be fighting for talent and money with a growing, exciting field. If you’re an investor, for-profit impact investors like Bamboo Finance will be pitching the same pension funds that you used to have a lock on. And if you’re a regulator, watch out: millions, and soon billions, of dollars are doing an end-around governments’ own poverty-alleviation and environmental agencies by going through foundations, private companies, and sometimes developed world aid agencies.
To review: (1) Social entrepreneurship is opaque and ill-defined. But (2) It also matters right now and it will matter more in the future. None of that gets at our original question, though–what is it? How can we split up the things people include when they talk about social entrepreneurship?
Many of the leading funders of social entrepreneurship–Acumen, Gray Ghost Ventures, Unitus, Ashoka–cut their teeth on microfinance. In brief, microfinance is the provision of loans, often in the developing world, that are typically at smaller amounts and lower interest rates than existing banks and moneylenders. Kiva, an online marketplace for microloans, is probably the most well-known. Among the other pantheon of microfinance gods are the Grameen Bank (and Nobel Prize winner Muhammad Yunus), Accion, and BRAC. Microfinance splits roughly into three camps: first, nonprofit microfinanciers like Grameen; second, government agencies such as USAID and DFID that underwrote the sector for decades; third, for-profit microfinance funders like Unitus, which invested in the for-profit Indian microfinance bank SKS. The latter are the most controversial; in 2010 SKS became the second microfinance bank to list publicly (and make some investors a boatload of money) at the same time that the suicides of some of its clients pushed the industry to the brink of collapse.
As microfinance’s golden age came and quickly passed, many funders moved in the early 2000s to the work of funding startups with high-growth potential and significant social impact. In 2007, these groups created the Global Impact Investing Network (GIIN) to promote their work. Today, this kind of investing is called impact investing. You might also hear the phrases patient capital, venture philanthropy, or social venture capital.
That work, broadly, is venture capital with a social or environmental twist. Ideally, social entrepreneurs will get seed funding from individual (angel) investors, then work through business incubators like Stanford’s D-Lab, the Unreasonable Institute, or Echoing Green, then receive capital from seed-funders such as the Unitus Seed Fund, the Mulago Foundation, and Village Capital; occasionally angel groups like Toniic and Investors’ Circle step in at this point. The next step up–talking here about amounts in the $500K-2m range–includes Shell Foundation, LGTVP and Skoll Foundation. Moving farther along the funding continuum means tapping deeper pockets like those of Omidyar.
It’s hardly that clean, of course. First, funders like the ones listed above often have multiple funds investing in different amounts, for example. Second, some of these funders give grants to nonprofits (which for-profit investors wouldn’t call “investing”), while others put equity into for-profits targeting mostly middle class consumers (which others wouldn’t call “impact”). Some will even give grants to for-profits while others make loans to non-profits. Third, the funding chain is hardly well-developed: speak to any entrepreneur on the hunt for investment and you’ll walk away more confused about the funding landscape than ever.
Still, the high-growth social enterprises that these groups fund (which are typically listed on the Our Portfolio section of their websites) make up a significant portion of the actual work going on in the arena of social enterprise. D.Light, Aravind Eye Care, Simpa Networks, One Acre Fund, DripTech, Embrace, Envirofit, and Grameen Phone are some of the household names within the social entrepreneurship family, along with Partners in Health, Riders for Health, Root Capital, FairTrade USA, and Teach for America.
What holds these companies together? They’re across the spectrum of developmental stage. Some are for-profit, some are non-profit, and some are hybrids. Some call themselves social enterprises; others blanche at the term. Some are successful and others–honestly–are struggling much more than they or their investors will admit. In large part, what binds these groups together is the network of linkages among the overlapping portfolios of each investors, the investor/donor list of each enterprise, and the incubators that gave them their first jolt. At their core, perhaps, all hearken back to our original definition of a social entrepreneurship: “innovative, sustainable, scalable, inclusive and measurable approaches” to big social and environmental problems. They’re selling more efficient cookstoves, solar-powered replacements for kerosene lanterns, eye surgeries, and irrigation systems to customers who would otherwise never have had access to potentially life-changing goods and services.
But wait! What about…
As social enterprise and impact investing have filtered into common use, a number of other sectors have piped up or piled in: “Hey! We’re already doing that–we’re impact investors, too” or “We’re social enterprises, but in a different way.” Community Development Finance Institutions have been pumping money into low-income communities for decades. Small businesses and the local banks that fund them argue fairly that deep impact is local impact. Fair trade organizations and worker cooperatives like FabIndia work to provide better wages to developing-world commodity farmers. Socially responsible investors have made huge strides in shifting mainstream capital into funds that exclude socially and environmentally hazardous investments.
Big bad governments, international bodies, and major corporations have been looking at market-based solutions to poverty for some time, as well. Major development banks provide capital to infrastructure projects in emerging markets, corporations have graduated from corporate social responsibility to innovative efforts like Vodafone’s M-Pesa and Avon’s “Ladies” in Africa. Traditional banks have, as well: JP Morgan has its own Social Finance unit; Deutsche Bank announced its Essential Capital Fund in September 2012. Bilateral aid organizations (USAID, DFID) were essential to the development of microfinance, and the World Bank and IFC have worked to pull capital and expertise into developing countries since their inception. In the last decade, a new form of finance, called social impact bonds, pulls together private, public, and social sector organizations to drive commercial capital to nonprofit activities.
Where to Show Up: Social Entrepreneurship Conferences and Meetings
Great! You’ve got the lay of the land, and you’ve figured out what you think counts as legitimate social enterprise and what is rubbish. Where are you going to go to meet other people like you? Every year there are a few key conferences and gatherings. Their relative importance shifts over time, but here are the ones that might still matter in 2013. First, there’s SOCAP, the largest gathering of social enterprises and funders on the planet and a complete circus. The Skoll World Forum at Oxford is its upscale version, where heads of state meet the Skoll Foundation’s investees. Opportunity Collaboration is a cozier weekend that in part connects wealthy individuals with entrepreneurs. Other gatherings include: Sankalp, the Intellicap-hosted Indian version of SOCAP; the Emerge Conference, the Skoll World Forum’s younger cousin; and the Foro Latinoamericano de Inversión de Impacto.
If you really want to impress, there are a few books you should probably have on your shelf. For a bit of (always inspirational, sometimes fluffy) introduction, scan The Blue Sweater by Jacqueline Novogratz, Out of Poverty by Paul Polak, How to Change the World by David Bornstein, and Banker to the Poor by Muhammad Yunus. For a bit more meat, move on to The Fortune at the Bottom of the Pyramid by CK Pralahad, Impact Investing by Emerson and Bugg-Levine and Social Enterprise by Marc Lane. Can’t get enough? The University of San Diego’s Sara Johnson has put together a pretty solid list on impact investing for beginners, and the report on everybody’s tongue in 2012 was “Blueprint to Scale” by Acumen Fund and Monitor.
Can multi-national pharmaceutical companies tackle the systemic challenges of global health for the poor? Wait a minute…should they even be trying? Dorje Mundle, tadalafil Global Head of Corporate Citizenship at Novartis, vialis 40mg asked these questions and more during his visit this week to the Skoll Centre.
First, capsule what are some of the challenges?
Poverty, lack of health education, limited numbers of heath care providers, and barriers to resources (e.g. infrastructure/medicines) are all big factors. Philanthropy is not enough, policies need to be changed, and new technologies need to be implemented.
So, how does big business fit into the picture?
I think it’s safe to say that Dorje and Novartis believe sourcing and driving innovation is one of its key roles. In its Arogya Parivar initiative (“Healthy Family” in Hindi), Novartis is implementing a social business model in rural India. It strives to increases both accessibility of health education and medicines and promotes health seeking behaviour for 42 million people at the base of the pyramid.
How does Novartis do this?
It’s a two pronged approach:
1. The first focuses on community healthcare education activities. Community meetings and health camps are run to teach about prevention and health on a general level (never about brands). Consultants are also on hand with medicines to increase accessibility and lower costs (travel/time) for health camp attendees. In addition, products are tailored to the villagers (small quantities mean lower prices and packaging in local languages is a plus). And most importantly, all of this is done by locals in local dialects while external advisors are used to make sure information is factually correct.
2. The second focuses on the business model. Obviously, the health educators drive demand (as health seeking behaviour increases). The product portfolio is communicated to doctors and pharmacists and systems are implemented to ensure supply chain continuity (stock-outs are not good). Add in external MFIs providing loans to pharmacies and doctors, and you’ve got a model that’s going places.
Or is it? Should Novartis continue with this innovative model? Will it be able to continue/increase its slim profits? Are there more conflicts of interest or ethical concerns that haven’t been addressed? Are more partners needed? In general, is it “appropriate” for multi-national corporations to be operating in this space?
Personally, I think it’s a great step. The challenges of global health aren’t getting smaller and traditional methods of solving them aren’t keeping up. Maybe what we need, as Dorje showed us, is a bit of creativity and experimentation along the way.
We are pleased to announce the recepients of the Skoll Centre Research Grants. This newly lauched scheme offers University of Oxford academics and researchers the opportunity to advance knowledge in the field of social entrepreneurship – with this year’s theme specifically focused on finance. It is an area timely and relevant to practitioners and academics alike.
We were so pleased to receive many other quality proposals from across disciples throughout the University. It is a promising sign that the scholary inquiry into finance for social and environmental advancement will only continue to grow and enrichen our understanding of its broad potential.
Congratulations to the recepients, and look out for next year’s research round in early 2012.
Impact, implications and opportunities for mobile phone water payments in Sub-Saharan Africa
A comparative study of the financial and societal implications of water mobile payment initiatives. It will explore:
the degree to which mobile banking can boost revenue collection and strengthen the financial base of water service providers
the extent to which mobile payments can benefit poor households due the lowering of water payment transaction costs
the broader potential of mobile banking platforms to unlock new and innovative models of water provision for the unconnected urban and rural poor in Sub-Saharan Africa.
Towards a Framework to Assess Credit Risk in the Group Lending Approach to Microfinance
The study aims to develop a tool for practical use in the assessment of credit risk among borrower groups. It is basedon previous empirical work identifying the three major sources of credit risk in joint liability group lending:
risk at the individual level pertaining to socioeconomic status, financial history and family support toward group membershi
risk arising from the particular purpose of loan use such as for productive investments, consumption, home construction, repayment of other loans and so on and
risk relating to group dynamics – particularly, the mechanism of group formation and levels of group cohesiveness.
This study will incorporate these major sources within a single analytical framework.
The Regulation of Micro-Banking Industries
This project aims to design a regulatory framework that can be used to help regulate micro-banking industries. It will explore whether the principals, rules, and institutions that regulate retail banking industries in developed countries can serve as a guide to build a “hybrid” model of regulation. It will then examine which types of institutions can effectively apply this hybrid model, with cases studies in Cambodia, Kosovo, and Fiji.