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.
This was the question that drove me to apply for the 1+1 programme, studying Water Science, Policy and Management for my MSc and continuing to the MBA this year. While there are many facets to unpacking this question, I chose to focus on understanding the financial barriers faced by people living in poverty, particularly Kenya and India.
What have I learned over the past two years? It’s (unsurprisingly) complicated.
There are usually two broad areas of financial barriers to water access.
First are the capital costs of purchasing water infrastructure for the house (such as utility connections, tanks, filters, etc).
The second are the recurring fees to purchase water for that infrastructure. This could be per litre charges from water utilities but may also include purchase of water from vendors, local taps or water kiosks.
I wanted to understand the factors driving the amount of water a household would purchase every day, so focused my research on the recurring expenditure. Using detailed records of all household expenditures from 298 poor Kenyan households over a year (data sourced from FSD’s fantastic Financial Diaries Project), I tried to understand trends in water purchase behaviour, and try to distill broader understanding about water affordability.
This different pattern of purchasing behaviour has implications for how we think about water affordability. We have set affordability thresholds using Western norms – as a percentage of total household expenditure. In Kenya, water expenses are clustered over a few months – while overall water expenditure may be low, this clustered expenditure can represent a large proportion of household income during the dry reason, resulting in acute affordability issues.
Why is this important?
The Millennium Development Goals were instrumental in shaping international policy, particularly how water and sanitation was thought about, measured, and delivered. Water quality, reliability, and affordability were not measured and the majority of the data collected were on what hardware was used to access the water (such as a pump, bucket and rope, or piped water system). This misses all the harder to measure indicators critical in water service delivery, such as if the pump is actually working, if the water is safe to drink or if people can afford to pay for the water. These metrics are now being re-evaluated with the Sustainable Development Goals.
We currently have an opportunity to influence how the international community thinks about water access in developing countries, and ensure that those who were excluded from the MDGs can be included in SDG approaches.
2016-17 Skoll Scholar, Ashley Thomas, has spent her career designing clean water and energy technologies to improve the lives of marginalised communities.
She spent seven years working in East and Southern Africa designing, manufacturing and selling products for bottom-of-the-pyramid customers. During this time she has developed and sold over 200,000 products, providing clean water and energy to over 2 million people in 7 different countries.
Not only does Ashley hold an Oxford MBA, she holds a Bachelor of Science in Mechanical Engineering from MIT, and has completed a MSc in Water Science, Policy and Management, also at the University of Oxford.
This was a special session at the Skoll World Forum, because it centered around an Oxford-style debate on the motion “Has impact investing been inflated?” Chris West and Mara Bolis argued for the motion, Cathy Clark and Lisa Kleissner argued against, and Julia Sze moderated.
It should be noted that speakers on both sides of the debate are active in developing the impact investing space, with neither of them opposed to the practice. Nonetheless, today they took a firm position either for or against the motion being debated, for the sake of creating a more thought-provoking debate.
The argument from Chris West and Mara Bolis broadly followed the one made in their recently launched report: “Impact Investing: Who are we Serving” (blog by Mara Bolis). Their key concern with the field as it stands today is that there is a mismatch between the type of capital supplied and the type of capital needed. “Because this sector is trying to behave differently, this money should behave differently”, pleads Mara Bolis. Too frequently, the social entrepreneurs who are knowledgeable about the financing needs of enterprises which serve the poor in developing countries, are left out the conversation when impact funds and other investment vehicles are designed. This has lead to unrealistic expectations about returns, and risks undermining the sector.
What can be done? Chris West argues that more patient capital is required, as well as more realistic expectations about returns. Entrepreneurs also need to ensure that they accept investment only at the right time, from the right people, and under the appropriate terms. Otherwise, enterprises can end up with “schizophrenic boards”, which cannot agree on whether to prioritize financial growth of social impact. Participants from all sides agreed that social investment finance intermediaries have a key role to play in helping entrepreneurs raise the right kind of capital, as do resources developed for entrepreneurs seeking investment, such as the CASE Smart Impact Capital toolkit.
Nigel Kershaw, OBE Chair of The Big Issue Group, addresses the panel of speakers.
On the other side of the debate, Cathy Clark and Lisa Kleissner spoke about the progress that has been made in developing this field, emphasising that there is genuine commitment to social impact among many of the funders have in the field. For instance, in the Toniic 100% impact network, over 130 individuals have pledged to use 100% of their assets for positive social and environmental impact, amounting to a total of over $4.5 billion in assets. Lisa Kleissner, who is a member of the network, shared her personal perspective: “The money that we [received] was more than we had hoped for, so we were willing to take a risk.” Her approach has been to work closely with entrepreneurs, understand their business model, and provide a combination of grants, loans, and other investments as needed.
The T100 project will provide other personal journeys and insight from 50 Toniic 100% impact members. The early findings are that 83% met or outperformed financial return expectations (in a sample of 40 portfolios), and 87% of all respondents met or exceeded their impact return expectations. However, what constitutes an annualised market rate of return varies considerably among respondents, leading 53% of respondents to state that the discussion around financial returns needs to be re-framed.
What can we conclude from this this debate? By one metric, the side against the motion won. The small group of 7 audience members who felt that impact investing had not been inflated grew to over 15 after the speakers finished their remarks. But they remained a minority in the room. Nonetheless, many audience members commented that “Has [the promise of] impact investing been inflated?” was the wrong question to ask. Inflated according to whom? And is it not too early to tell? What is clear is that the field has developed substantially in the last 15 years. Regardless of whether early results meet or defy expectations, the recently created sector infrastructure (funds, advisors, measurement experts, and other intermediaries) will enable growth, better capital placement, and better impact outcomes in the coming years.
As you may know, term has started and things are getting more exciting everyday here at the Centre. Part of that excitment has been fueled by opportunities like the ones below. Feel free to peruse them and see if any are of interest to you!
Dr Larry Brilliant is coming to Oxford
Dr Larry Brilliant, President of the Skoll Global Threats Fund, will be speaking on ‘Pandemics – Can we eliminate major worldwide epidemics?’ on 22 October at 17:30. To register or for more information click here.
Are you interested in working in Russia? The Alfa Fellowship Program is a professional development program placing American and British citizens in work assignments at leading organizations in Russia in the fields of business, economics, journalism, law, public policy and related areas. Financial and programmatic support are provided. Apply by 1 December.
Want to help WAMT generate its own income through social business? If so, apply to intern and help compile a costed Business Plan for the social business(es) WAMT wishes to pursue. For more information contact Andy Kelmanson, Chief Executive at email@example.com.
The Skoll Centre’sAlex Nicholls was recently on sabbatical at various social entrepreneurship organisations in Australia. While there, illness he had the chance to talk to SkyNews on the global nature of social entrepreneurship and its evolution over the last decade. Hear what he has to say about measuring the impact of social entrepreneurship and the future of social finance markets. Watch the video here.
This post was writen by Skoll Centre Director, diagnosis Pamela Hartigan.
If you are an investor who has been wooed by impact investing and are looking for solid deals, capsule where do you go?
That was the challenge faced by Ron Cordes, order a wealthy New York based entrepreneur who was faced with the prospect of conducting due diligence on a myriad of possible social investment deals – without the time or expertise to do so. But rather than give up, as many frustrated investors might do, Ron sought the help of the Calvert Foundation and together, launched ImpactAssets last year with capital from Ron Cordes’ Foundation, the Rockefeller Foundation, and other leading philanthropic and financial services sponsors.
ImpactAssets is a non-profit financial services company (I know that sounds like an oxymoron, but then, think of OneWorld Health, the first US non-profit pharmaceutical company). It combines both philanthropy and asset management to mobilize capital for social and environmental impact. At present, it has current assets of US$60 million and offices in San Francisco, New York, Seattle and Bethesda, Maryland.
I happened to be in New York this week and took advantage of a brief respite from meeting- mania to have coffee with my long-time friend and social investment pioneer, Jed Emerson. In catching up with one another’s professional and personal lives, Jed told me about his involvement in ImpactAssets – which in addition to him, has drawn upon some of the “greats” in the impact investing field, including Tim Freundlich as its President and as its Chairman, Wayne Silby, the creator of the Calvert Fund and Foundation.
As it turned out, I was serendipitously in the city for the launch of ImpactAssets 50, s a very cool initiative. In short, Cordes invited a group of impact investing experts, of which Jed is one, to review and select the top 50 fund managers who are taking the best of the for-profit and not-for-profit structures and blending them to yield social, environmental and financial returns. Criteria for consideration in this blue ribbon group include over three years experience in the impact investing field, a minimum of US$5 million under management, and a demonstrated commitment to social/environmental impact at the portfolio level.
In this way, wealth management advisors have a list of places to start their due diligence in looking for funds for their clients to invest in or products to place in their portfolios.
It will be exciting to see how ImpactAssets evolves in the coming years, how many fund managers will vie for the privilege of being selected among its Top 50, and how many entrants are spawned to compete with this very promising venture.