Macrocredit: a shared value approach to reducing poverty in rural Africa.

Who is Yunus?
Who can move up the economic pyramid by microcredit programs?
What did Porter and Mark Kramer suggest is needed to help people make a difference in their lives?

Transcription

1 Macrocredit: a shared value approach to reducing poverty in rural Africa. September, 2014 William S. Lightfoot & Barend van der Vorm Village Inc. Africa 1

2 Abstract Since 1990, the number of people living in extreme poverty has been cut in half. Today, 1.2 billion people live on less than $1.25 per day (UNDP, Online). A great deal of credit has been given to the Grameen Bank and Muhammad Yunus for initiating microcredit (or microfinance) programs which are seen as a means by which the poor can move up the economic pyramid. And while a great deal of evidence shows that microcredit helps many people better manage their families finances, other evidence shows that it does not often enable the poor to enter the ranks of the middle class or lead to the creation or growth of entrepreneurial ventures. So what is the answer? To borrow liberally from a famous comment attributed to Mother Theresa, If I focus on the one I may not have much impact, but if I focus on the many, I may help an entire community prosper. Creating shared value through the creation of for profit companies in rural villages may be a significant part of the longterm solution that alleviates poverty. Leveraging social capital, and community cohesion, these Village Companies ( VC s) focus on economic and social benefits (as opposed to or ) bridging the gap that exists between modern theories of capitalism and poverty alleviation. This paper presents an initiative started in 2009 by Village Inc. Africa ( VIA ) in Tanzania that has been proving the concept of what we call macrocredit. 2

3 Introduction Microfinance can be defined as the business-like provision of financial services to the poor (Roodman, 2010). Financial services may include credit, savings, and insurance. Muhammad Yunus the Nobel Peace Prize winning Economics Professor from Bangladesh credited with starting the microcredit boom in the mid 1970 s defines it more narrowly as small loans without collateral that help lift women (in particular) out of poverty (1999). As a subset of microfinance, microcredit typically involves providing small loans in amounts equal to $25 to $50 at a time to poor people in poor economies. The recipients of the loans often women, invest the money in their micro enterprises increasing (over time) their household income which helps them to rise out of extreme poverty, to get better education for their children, and indeed, may even help their communities to decrease poverty over time. The impact of microcredits may be largely felt by the families of the people who borrow the money. According to a Collins, Murdoch, Rutherford, and Ruthven (2009), microcredit is successful in helping the borrowers cope with poverty. They borrow money when they need it to help them put food on the table or pay for health care or other things we often take for granted. The repayment rates are typically very high largely because of their desire to keep future access (Rosenberg, online, 2009) to the microcredit (i.e. to be able to borrow again when they need it). Because interest rates on the microcredit loans are often lower than local money lenders, or other sources of credit, and often backed by externally supported financial institutions, they often provide stability, and support services that are mutually beneficial to the lenders and the borrowers. 3

4 While microcredit can help people cope with poverty, numerous scholars have found that microcredit alone is not enough for helping people change their economic status. In at least one study, the authors found that while microcredit opens up selfemployment opportunities to some people who would otherwise either work for someone else, or be underemployed, it can also lead to increases in poverty. The real key is the graduation rate of the recipients of microcredit (Ahlin and Jiang, 2005). The graduates, Ahlin and Jiang say, are those who manage to save enough money to be able to scale up their enterprises to the point where they are employing other people (2005). How effective microfinance is at scaling up enterprises remains a question. Based on several studies in India, Mexico, Philippines, and Morocco, Innovations for Poverty Action (IPA) concludes that while borrowers seem happier, and that having access to capital helped increase trust in others, and increased the influence of women in household finance decisions (online) it did not translate into the start up of new businesses. As Dean Karlan, Yale University economist and founder of IPA said It is important to understand that microcredit alone does not transform people into successful entrepreneurs, but having a loan available when you need it can make your life much easier. (Online) 4

5 Figure 1: Potential Impact of Microcredits and Macrocredits Crafting a new entrepreneurial venture is an ongoing process (Matthews, Dalglish, and Tonelli, 2013). It is clear that in many cases, microcredit is successful in helping many people lead a more stable life rather than create and grow new business ventures. And the microfinance institutions ( MFI s) who lend the money seem content to let the borrower establish the market and manage the supply chain, leveraging their own (the borrowers) community connections. As Matthews, Dalglish, and Tonelli (2013) note many microcredit schemes lend money on a group basis, where social capital is the collateral, leveraging the potentially harmful effects of being a community member to shame people into repaying the loans (p. 7). Rather than leveraging the community and social capital to help the borrowers grow their businesses, the MFI s view social capital as a means to ensure repayment. As Banerjee and Duflo (2011) note, shame alone seems to be sufficient to ensure a high repayment rate. When an old loan is repaid by a new 5

6 loan, the repayment rate of the MFI may increase, but little wealth is created. The focus is on reducing the loss of capital, rather than the growth of capital. As for helping to build business and increase employment opportunities while empowering women, Banerjee, Duflo, Glennerster, and Kinnan (March, 2014) found little if any impact. So at best, one might be able to claim that microcredit has led to an entire generation of people who are still poor, but perhaps less desperately so. To really impact the poor, and to help in the creation of more entrepreneurs, and thus more businesses numerous authors (including Honig, 1996 and Mathews et. al., 2013) claim that the focus should be on leveraging social capital and community involvement. Michael Porter and Mark Kramer (2011) suggest that a broader based approach that they refer to as creating shared value ( CSV ) is needed to ensure that when investments are made to the poor, it is the beginning of a process that has numerous benefits to the investor, the people they invest in and their communities over time. Rather than redistributing wealth, CSV is about expanding the pool of economic and social value (Porter & Kramer, p. 5, 2011). Rather than an investment in individual borrowers, Porter and Karmer argue for an investment made on behalf of the many (2011). Rather than a micro approach where the focus is on small loans made to individuals, a macro approach where the focus is on sustainable growth and collaboration with the community is called for. From this thought process and by a process of trial and error, a new concept in credit was born: macrocredit. 6

7 Macrocredit "Macrocredit is an investment made in village companies which develops a stream of revenue through the creation of new products and services that benefits the investors, employees and communities through the intentional distribution of profits." The beneficiary of macrocredit is a Village Company ( VC ). VC s are designed to help the community develop their own successful businesses, delivering a wide range of benefits (See Table 1). Started with a loan made by an impact investor, the goal is to generate measurable social and environmental impact, alongside a financial return (Global Impact Investing Network, Online). In addition to providing the company with credit, the investor also provides a wide range of support designed to help the community benefit from the provision of investment. And because the focus in this initiative is on the creation of VC s creating shared value for the investors, the company stakeholders, and the entire community, we call this new approach to lending macrocredit. Table 1: The Benefits of Macrocredit. 1. Access to capital and the funding of direct investment in the village's economy; 2. Community benefits from the distribution of profits to social needs; 3. Education in entrepreneurship, business and governance skills promoting sustainable growth; 4. Ownership by the community linked to leadership, dignity, independence and broad support / buy-in from the community; 5. Stimulation of economic activity in the village; 6. Creation of economic clusters; 7. Increased economic activity as the Village Company becomes a distribution network for third party vendors; 8. Improved social conditions such as health care, education etc. 9. Positive impact on youth and reduced flight to urban centers to find employment. While there are many examples of cooperatives, business incubators, and even villages that start companies, this model is unique in the structure, and in the manner in which the village is placed in control of its own destiny. The initial pool of shareholders 7

8 is limited with members of the village selecting the founders based on a set of guidelines and rules from a local Village Company Incubator ( VCI ). Each year new shares are issued, ensuring wide distribution, and fair representation from all villagers. The incubator provides as much assistance, education, and support as is needed withdrawing gradually as the village is able to take on more and more responsibility. Each VC is a part of a VC cluster of up to five Village Companies. (See Chart 1: A Macrocredit Cluster). The VC clusters are supported by the VCI, which serves as the investor s local representative. The Village Companies within each cluster are chosen based on proximity to one another. This allows the VC s to trade with each other, enabling a larger economic base from which to develop the market. The incubator is designed to support up to 5 VC clusters, for a total of 25 Village Companies. As the VC s and VC Clusters develop, the Incubator works with the VCs to identify and implement new businesses, products and services creating a local eco-system that allow the VC to continue to grow. The Monaco Social Business Association ( MSBA ) designed and financed the first macrocredit initiative in 2009 in Arusha, Tanzania. In 2010, they received a grant from the Department of International Cooperation in Monaco 1, and in 2013 and again 2014, from StartFund of the Netherlands 2. In 2014, the SEED Initative recognized VIA as one of its annual award recipients citing its innovative business model, and focus on governance. In addition to a small amount of funding, SEED provides consulting advice, and ongoing support for 1 year for all award winners. 1 See International-Cooperation for more details on the Principality of Monaco s support. 2 See for more details on Startfund. 8

9 Chart 1: A Macrocredit Cluster Macrocredit in Action: The Village Company Model, Babati Tanzania 3 The VIA Village Companies are registered limited liability companies owned by the villages and the VC incubator (in this case, the VCI Babati or VCI-B ). As a separately funded initiative of the impact investor, VCI-B is designed to accelerate the growth and success of VC s, by providing technical expertise and the financial capital required to create sustainable and profitable Village Companies. The number of shareholders in each village is increased each year until all eligible residents of the village own a share in the VC. A Board of Directors ( BOD ) and a Management Team ( MT ) lead the Village Company. The BOD is elected by the community, and is accompanied by a VCI-Babati representative to assist and advise where needed. The Management Team, selected by the 3 This section adapted from The Village Company Model written by Barend Van der Vorm on behalf of Village Inc. Africa ( VIA ). 9

10 Board, manages the VC. Both entities are trained by VCI-Babati to build sustainable businesses, based on the principles of business excellence, accountability and transparency (See Chart 2: Process for Establishing a Village Company). Chart 2: Process for Establishing a Village Company T 10

11 The VC engages in business and projects whose profits are transferred to serve social needs in the village. The fact that the village itself both produces and decides on the social impact in the village fosters dignity, ownership, leadership, and effectiveness in providing for such social needs as health care, education, and community development. The VC approach creates a cost-effective, sustainable entity with lasting impact. It allows for inclusive ownership and governance according to Tanzanian law, while fostering economic activity that directly benefits the community in which it is active. The resources of the village are unlocked by combining finance with local products, local management and local ownership. The VC profits from reducing existing inefficiencies in the value chains of locally produced goods. Setting the VC up as a limited liability company reinforces the long-term viability of success. The promotion of business principles and private sector development within a framework of legal governance requirements such as accountability and transparency further increases viability. Example of Direct Benefit of Village Company Model One new initiative that holds promise of positively impacting the community in a variety of ways is the building of homes. The VC s plan to collaborate to build new homes that are offered to residents through mortgages. Homes in these villages normally take years if not decades to complete. By providing 3 to 7 year mortgages, and homes built using locally sourced materials, and local labor, families can reduce the time it takes to move into a new home to months. And the impact on the community is multifaceted: 1. Home building generates substantial local economic activity; 2. Governance of new home building is owned and managed by locals who understand best the local context; 11

12 3. Villages develop specific skills useful locally outside of traditional sources of income like agriculture; 4. These skills can lead to core competencies, meaning one VC may produce bricks, another roof trusses, and a third furniture that can be sold to other villages in its cluster or beyond. 5. Many jobs are created through home building; 6. VC's generate additional profit which is plowed back into the village economy and finances health care and education; 7. Proper homes empower the family structure and contribute to a safer and healthier environment; 8. A percentage of new homes is allocated to those who can not afford it leading to a civic society and a "Life of Dignity for All". A variety of businesses are needed to help with the construction of these homes and by working with each other, the VC s can specialize on specific activities that allow them to sell to other villages thus expanding their markets. (See Chart 3: Macrocredit Cluster showing Core Competency s of Each VC). Women are also included in the process of building the homes consistent with the focus on helping to empower them through education, and inclusion in the economic life of the community. Chart 3: Macrocredit Cluster showing Core Competency s of Each VC 12

13 Summary Eradicating extreme poverty is the first millennial development goal as identified by the United Nations Development Programme. While progress has been made, there are still more than 1.2 billion people who live on less than $1.25 per day. Microcredit initiatives have proven to be an effective means for helping people reach a level of subsistence. They have not proven to be an effective means for growth of businesses, for developing entrepreneurs, or for community economic development. Macrocredit holds promise as a better way to create jobs, improve communities, and lift people out of poverty as it is an investment that creates shared value for all while allowing the people to retain their dignity. 13

14 References Ahlin, C. & Jiang, N. (July, 2005). Can Micro-Credit Bring Development. Vanderbilt University. Retrieved from /03.pdf. Banerjee, A. V. & Duflo, E. (2011). Poor Economics. A Radical Rethinking of the Way to Fight Global Poverty. New York: PublicAffairs. Banerjee, A. V., Duflo, E., Glennerster, R., Kinnan, C. (March, 2014). The miracle of microfinance? Evidence from a randomized evaluation. Retrieved from Collins, D., Murdoch, J., Rutherford, S. & Ruthven, O. (2009). Portfolios of the Poor: How the World s Poor Live on $2 a Day. Princeton: Princeton University Press. DANIDA, (2002). Joint Review of Women and Youth Training and Extension Project (WYTEP). Phase III in Karnataka, India. Final Report. Copenhagen, Denmark: Development Associates A/S. Global Impact Investing Network. (Online). Impact Investing. Retrieved from Honig, B. (1998). What determines success? Examining the human, financial, and social capital of Jamaican micro-entrepreneurs, Journal of Business Venturing 13, Innovations for Poverty Action. (May 13, 2013). New Evidence Shows Microloan Impacts Are Not Where Expected. Retrieved from Mahajan, Vijay. (October 8, 2005). From Microcredit to Livelihood Finance. Economic and Political Weekly. Matthews, Judy H., Dalglish, Carol L., & Tonelli, Marcello (2013). Micro- credit is not sufficient for the success of micro-enterprises at the bottom of the pyramid. In Academy of Management Africa Conference, 6 10 January 2013, Johannesburg, South Africa. Pollin, Robert (2007). Microcredit: False Hopes and Real Possibilities. Foreign Policy Focus. Retrieved from Porter, M. & Kramer, M. (January, 2011). Creating Shared Value. Cambridge: The Harvard Business Review. pp Roodman, David. (October 11, 2010). What is Microfinance?. Center for Global Development. Retrieved from 14

15 Rosenberg, Richard. (October 5, 2009). Does Microcredit Really Help Poor People? Sachs, J. (2005). The End of Poverty: How We Can Make It Happen in Our Lifetime. London: Penguin Books. United Nation Development Programme. (Online). Eradicate Extreme Poverty and Hunger. Where do we stand? Retrieved from Van der Vorm B. (2013). The Village Company Model. Monaco: Village Inc. Africa. Yunus, M. (1999). Banker to the Poor. Micro-lending and the battle against world poverty. New York: Public Affairs. 15