Africa Finance Forum Blog
Crowdfunding - think Kickstarter, Indiegogo or Kiva - is popular and growing. About a year ago, infoDev, a global innovation and entrepreneurship program in the Trade and Competitiveness Global Practice, released a report titled 'Crowdfunding's Potential for the Developing World' in which it explored what crowdfunding, on a larger scale, could mean for high-potential enterprises in developing countries. The study quantified for the first time the value of crowdfunding, estimating a global market of $96 billion by 2025 - 1.8 times today's global venture capital industry. The study outlined specific recommendations for policymakers and business accelerators that focus on high growth entrepreneurs and innovative ways of access to finance.
Now, almost a year later, infoDev is seeing the first results of the pilots it is putting in place to test the viability of crowdfunding within its network of incubators. With the support of Crowdfund Capital Advisors, infoDev's Kenya Climate Innovation Center (KCIC) is implementing the Crowdfund Investing Pilot, a project designed to mentor and train six carefully selected Kenyan startups on crowdfunding and online fundraising campaigns.
With the six entrepreneurs already working on their campaigns, it's time to reflect on a few key recommendations of the report.
Recommendation 1: make sure companies are ready to crowdfund. Identifying companies suitable for crowdfunding is key to the success of every support program. In order to "vet" businesses, it might be useful to employ a number of different methodologies, such as concept and marketing competitions, online surveys, and in-depth interview with the candidate entrepreneurs.
Reality: In Kenya, infoDev devised the Crowdfunding Readiness Survey to screen companies by interest, capacity and capability for participation in the pilot. This selection mechanism examined the profile of the company's management team, legal status, maturity, business model (including value chain), current accounts, capital needs, crowdfunding aspirations, and social media presence.
The difficult part was to make a selection in a standardized way. The selection process could only provide the selection panel with a 'raw' indication of the entrepreneurs' readiness and was necessarily augmented by additional evaluation methods. Out of the 73 companies that are currently working with the Kenya CIC, 16 were invited to a pitch competition. By observing other factors, such as personality, presentation and communications skills, the project team was able to make a more accurate decision on which entrepreneurs could be successful crowdfunders. The process was analogous to the investment decision of Silicon Valley super angel Ron Conway who famously said: "We invest in people first."
Recommendation 2: partner with the right platform. There are four types of crowdfunding platforms: Donation, Perks/Pre-order, Debt, and Equity. To launch an effective campaign, the project needs a systematic method for selecting the appropriate platforms for each identified company.
Reality: in Kenya, given the infancy of the crowdfunding market, it was crucial to identify platforms with a critical mass of active funders. Out goes Kickstarter. Project backers that register on Kickstarter may hail from anywhere across the globe, but project originators must be registered in the US, UK, Canada, Australia, New Zealand, the Netherlands, Denmark, Ireland, Norway and Sweden.
Next, our team established which platforms posed the least legal and regulatory risk in Kenya. The team relied upon local legal experts for an analysis of the Kenyan securities regulatory environment and determined that although equity crowdfunding might be permissible within current framework, it posed too much legal risk to the outcome of the pilot.
Lastly, the team considered which platforms would best to complement the business models of the pilot companies. Because many of the businesses sell their products directly to consumers, the "pre-sale" model offered by Indiegogo was a very interesting choice. Moreover, many of these consumer products target underserved African communities and therefore could be best supported with the addition of crowdfunded consumer finance, offered for example by platforms like Kiva.
Recommendation 3: learn from previous experiences. Every country, every company, every product, every community of users is different. There is no perfect formula for designing and running a successful crowdfunding campaign. Learning by trial and error is very important and organizations that support crowdfunding play a critical role in capturing, analyzing and spreading this knowledge.
Reality: the Kenya CIC is capturing knowledge around all aspects of the Crowdfunding Pilot, including company selection, training materials, mentorship techniques and will conduct ongoing data capture and analytics on the crowdfunding campaigns while they are active. The data captured by center on the six winning companies and their campaigns - whether or not they turn out to be successful - will be a stepping stone to a better understanding of the challenges and opportunities of crowdfunding in the country.
Development organizations like the World Bank, governments, venture funds, and NGOs should continue to study crowdfunding to better understand its potential and determine how it can provide innovative solutions to the "last-mile-funding problem" faced by many start-up companies in the developing world.
Sam Raymond is a Consultant with infoDev's Access to Finance Program. His work with the World Bank Group centers on the development of projects that address challenges faced by entrepreneurs in acquiring financing to scale businesses and create jobs. Prior to joining the World Bank Group, Sam worked as a Research and Staff Assistance to Speaker of the United States House Representative Nancy Pelosi.
This blog was originally posted on the World Bank Group's "Private Sector Development" blog.
You don't have to spend very long in Rwanda before you start to be impressed by the financial inclusion landscape in this country - not only by the progress made over the past several years, but by the scale of ambition for the rest of this decade and beyond.
The government has set a target of 90 percent financial inclusion by 2020 and the evidence of progress toward this goal is everywhere: Advertisements for mobile-money products are painted and plastered onto almost every available surface and, if you know what to look for, it doesn't take long to spot an Umurenge Savings and Credit Cooperative (Umurenge SACCO) - Rwanda's signature financial inclusion initiative.
Six years ago, the 2008 FinScope survey found that that 47 percent of Rwandan adults used some type of financial product or service, but just 21 percent were participating in the formal financial sector, which was at the time made up mostly of banks but which also included a handful of microfinance institutions and SACCOs.
Largely in response to these figures - and in particular to the large urban/rural divide illustrated by the data - and the government set out to establish a SACCO in each of the country's 416 umurenges, or sectors. The Umurenge SACCO was born.
An Umurenge SACCO in Kigali, Rwanda.
With initial government support in the form of manager salaries and staff training, Umurenge SACCOs quickly began to spread across Rwanda. By 2012, FinScope data showed that the percentage of Rwandans using a formal financial product had doubled to 42 percent - an increase due almost entirely to the 21 percent of Rwandans who reported that they were using an Umurenge SACCO to save or borrow. The initiative was especially successful in expanding access to financial services outside of urban centers: As of 2012, 80 percent of Umurenge SACCO members were from rural areas.
As is often the case, however, impressive headline numbers mask considerable complexity. As part of a preparation mission for the Financial Inclusion Support Framework (FISF) program, my colleagues and I were able to visit a nonscientific sample of Umurenge SACCOs. What we saw were impressive institutions run by dedicated staff, many of them in places where you'd be hard pressed to find a bank.
Yet the challenges were clear. The manager of an Umurenge SACCO we visited in Kamonyi said that his chief concern was dealing with the inefficiencies and risks associated with running a 5,700-member SACCO on a paper-based system. Indeed, it was striking to see dozens and dozens of wooden boxes filled with members' files in a back room. (To their credit, the Rwanda Cooperative Agency is taking initial steps to address this problem and will soon begin a pilot program to computerize 90 Umurenge SACCOs.)
Member’s files at an Umurenge SACCO in Kamonyi, Rwanda.
In a related limitation, the potential of Umurenge SACCOs is constrained by a lack of interoperability and network connectivity. A member of one SACCO cannot withdraw his or her money from another SACCO or ATM. So traders traveling to Kigali to do business must withdraw money from their local SACCOs and carry a wad of cash rather than wait until they arrive before making a withdrawal - the type of inefficient and potentially dangerous outcome that the formal financial sector is meant to ameliorate.
We also saw first-hand that high levels of formal account ownership may obscure shortcomings in product quality or value proposition. At the same SACCO in Kamonyi, close to half the savings accounts had not been accessed in the past six months, a trend that could be linked to the FinScope finding that 26 percent of SACCO members report having joined because they felt that they were obliged to. Umurenge SACCOs have also struggled to reach the very bottom of the pyramid: Just 3 percent of SACCO members are from the lowest income category (Ubudehe Category 1).
There are issues of product suitability on the credit side, as well. Qualitative evidence suggests that SACCO loans often cannot be disbursed quickly enough to meet the short-term consumption or emergency credit needs of Rwandese. And, like many financial institutions, Umurenge SACCOs must tread a fine line between managing their portfolio risk and meeting the borrowing needs of their members. This can be particularly constraining for entrepreneurs, who still need to rely on banks for larger or longer-term loans. With more advanced risk-management skills, Umurenge SACCOs may be able to play a larger role in the future for the financing of micro, small and medium-sized enterprises (MSMEs). But their current role as an entry point into the formal financial system for MSMEs is itself a significant contribution.
The recently released World Bank Consumer Protection and Financial Literacy diagnostic also suggests that much remains to be done in the realm of consumer protection. While the loan and insurance forms we saw were relatively advanced in terms of transparency and clarity, there is scope for improvement in several areas (for example, in the disclosure of the effective interest rate). These responsible lending practices also need to be institutionalized and uniformly enforced through a more comprehensive regulatory and supervisory framework.
Enter the World Bank's recently launched FISF country support program, designed to help Rwanda ensure the sustainability of recent gains and continue to advance toward its goal of 90 percent financial inclusion by 2020. FISF support consists primarily of technical assistance and capacity-building in five key areas of financial inclusion: MSME finance, consumer protection, financial education, payments, and monitoring and evaluation.
While the exciting FISF program has only recently begun, one thing is already clear: The government's commitment to achieving its ambitious targets, and the momentum created by Umurenge SACCOs and other initiatives, make it a very exciting time to be working on financial inclusion in Rwanda.
Douglas Randall is a Research Analyst in the Finance and Private Sector Development Team of the Development Economics Research Group. He joined the Bank in September 2009 and is currently the lead data analyst for the Global Financial Inclusion (Global Findex) Database.
This blog was originally posted on the World Bank Group's "Private Sector Development" blog.
Financial inclusion has become a contributing factor to the achievement of the Millennium Development Goals (MDGs), particularly MDG1, which promises to eradicate extreme poverty and hunger. The MDGs also include a gender-specific target for achieving full and productive employment and decent work for all. MDG3 is aimed at promoting gender equality and empowering women, and includes a specific reference to women's economic empowerment. Globally, women account for 66% of the labour force and have played a major part in the growth of small businesses. Women entrepreneurs, in particular, are contributing significantly to economic growth by creating jobs and generating revenues. Yet, women-owned businesses' access to credit remains difficult.
In rural areas of Africa, women constitute the largest percentage, 70% of the rural labour force that derives their livelihood from subsistence agriculture. A large number of these farmers aspire to employing better production techniques that can lead to increased output. However, they are dealing with challenges of access to capital that would enable them re-invest their businesses. Only thirteen per cent (13%) of rural people obtain loans from banks for re-investing in agricultural production. This lack of access to finance for the poor, particularly for rural women is attributable to a number of factors including, the location of their businesses and banks' perception of agricultural lending as risky business. Currently, there a few products for agricultural lending tailored to suit women's needs and to couple this, the lending criteria employed by banks is complicated for women. Moreover, the reality in most African countries is that women lack access to and control of land, which serves as collateral for bank loans. There exists also a fear by women to walk into banks and/or financial institutions due to the language barrier. The list can be endless: Mobility restrictions due to the geographic spread of homes across large areas; low levels of education and business training that hampers skills in record keeping, business plan preparation and general management of the business. All of these barriers affect the performance, growth and sustainability of women's enterprises.
In addition to these barriers, the New Faces New Voices (NFNV) Uganda Chapter, a Graca Machel Initiative, identified specific gaps for rural women in terms of access to finance including: little or no formal education, inadequate training on formal financial literacy, women being perceived as housekeepers and not fit to participate in economic activities and poor infrastructure in rural areas.
Against this backdrop, and in an effort to address the challenges of women's access to finance in rural areas, NFNV Uganda Chapter, in partnership with the Uganda National Entrepreneurship Development Institute (UNEDI) began implementing a Financial Inclusion model through the Savings and Villages Enterprises (FINISAVE), a financial cooperative model aimed at increasing the availability and size of finance in remote areas. The FINISAVE Model is based on two schools of thought: (i) People do earn some income but need to be guided on responsible spending and on investments that fall within their income; and (ii) collectively pooling resources together for improved household incomes while working hard on key productive value chains. The FINISAVE model was pilot tested in Lwengo District, with more than 125,000 women entrepreneurs, and a total of 250,000 men and women in 465 villages benefitted from this initiative.
We noted the following during implementation: (i) The sharing of costs through a public-private-civil society partnership has assisted in addressing the lack of infrastructure in women accessing financial institutions in rural areas; (ii) through the formation of savings and investment village based groups that is linked to a commercial bank via mobile banking, women in rural areas are able to work in profitable and sustainable investment cooperatives; (iii) the model underscores a paradigm shift in the cultural and traditional beliefs that a woman is a mere house labourer. This was done through a high-level business and financial literacy training programme, which encouraged communities to move towards self-discovery, a mind-set change, enabling a woman to identify opportunities around her. These women, who had previously not seen the inside of the bank, can now confidently walk into a bank with clear knowledge of the banking services, products and their rights as consumers.
Looking forward and from what we have learnt from this process, regulatory authorities and financial institutions should:
- regulate agent banking services shifting from a corporate culture to a pro-poor service delivery that is context specific;
- create rural women guarantee and production material subsidy funds;
- embrace and highly promote the policy of public-private civil society partnerships in financial service delivery;
- design products that can be accessed by all categories of the female clients especially those at the lowest financial strata;
- build capacity to serve women as a special segment by developing new finance models specifically geared towards increasing access to finance. The proposed initiatives should address the gendered factors that constrain the growth and sustainability of rural women's businesses.
- There must be a mind-set change and paradigm shift that the rural populace are merely recipients of corporate responsibility to financial institutions and that poverty is part of the package for rural communities in Africa. This will be a missed opportunity, as the rural populace are credible, vital contributors to the economies in Africa.
In a panel in a recent IFC/MasterCard Foundation conference in Johannesburg, Mark Flaming of MicroCred reminded us that there is a tension running deep in all regulatory discussions of digital financial services (DFS) for financial inclusion, and that is between the banking and payments traditions. These are differentiated regulatory pillars that are deeply ingrained institutionally as separate departments within every central bank, and as separate committees within the Basel structure at the top of the global regulatory food chain. The two traditions are increasingly encoded legally, as more developing countries are passing payments systems laws distinct from banking laws.
Payment system departments within central banks have an instinctive understanding of network effects, so they tend to be friendly to an inclusion agenda that promises to connect more people to payment networks. Also, their general aspiration is to increase the share of transactions that happen in real time and reduce credit and counterparty risk, so digital financial inclusion platforms are in fact supportive of their system stability objective.
Banking supervision departments, on the other hand, tend to take a much more cautious approach. They tend to worry much more about financial depth relative to the volume of economic activity rather than the size of the population. Their supervisory resources are much more overworked given the inherently more complex and untransparent business of banking, and tend to look at technology, service and business model innovation with more suspicion, as things that could potentially get out of hand. The global financial crisis has of course given them ample evidence to support this instinct. They are more focused on protecting what is (risks) than on pushing the frontiers (opportunities).
So which side of the regulatory house should own, or at least take the lead on, financial inclusion for the masses in developing countries? Things have moved fastest in countries that have given it to the payments side, which tends to be more in tune with infrastructure-light digital service platforms and more comfortable dealing with a broader range of players. Under a new type of e-money issuer (EMI) license, they are letting non-banks (and in particular mobile operators, but also electronic top-up specialists and independent retailers), offer basic transactional services to those for whom traditional banking services are too costly, inconvenient, or simply unavailable.
But this has been the problem: payments people very reasonably worry that this foray into proto-banking risks tipping their side down a regulatory slippery slope that may lead to the kind of burdensome prudential and consumer protection regulation that mires the banking side. One way to avoid this has been to sharpen the differences between electronic money and banking services - so that putting money in an electronic money account is made to feel very different to putting money in an electronic bank account.
Accordingly, EMI licenses in many countries carry tough restrictions such as precluding payment of interest on saved balances, imposing lower account caps, banning their marketing as savings accounts or using the term banking at all, banning the bundling of credit offers even if they are funded externally to the EMI, and excluding them from deposit insurance. But this just seems like an overly limited banking option for the poor: financial inclusion ought to be more than payments.
This sharp distinction between EMIs and banks has also introduced regulatory arbitrage opportunities between banks and EMIs, insofar as the payments and banking supervision departments set different standards for service functions common to both, such as requirements for account opening, e-channel security, and contracting of retail stores as cash in/out agents. In some countries, this has made it easier for mobile operators rather than banks to offer basic financial services to the (traditionally excluded) mass market.
I argue in a new paper that the next round of regulatory reforms for financial inclusion needs to address both these issues. By neglecting savings, the current practice does not serve a full enough vision of financial inclusion.
Firstly, EMIs licensed under payments system frameworks need to be unencumbered from unjustified restrictions. In particular, they should be able to offer savings services on the same basis that banks do. For the essence of banking is not the mere act of taking deposits (which is easy to supervise), but rather the reinvestment of those funds in a way that entails credit and liquidity risk (which is not so easy to supervise). Accordingly, EMIs serving the poor should be reinterpreted as narrow banks - institutions that take deposits from the public and manage customer accounts on the same terms as banks do, but that do not intermediate the corresponding funds. Because narrow banks don´t themselves place bets with depositors´ money, they should remain firmly in the payments pillar.
Secondly, regulation should aim not only to introduce new types of competitors, but also to create a more level playing field between players licensed under banking and payments pillars when they perform similar functions in similar fashion. Banking regulators need to be much more open to adopting the kinds of regulatory practices that payments regulators employ routinely when real-time technology platforms are used in a way that minimizes credit and counterparty risks. A key element here is cash in-cash out (CICO): it should not be any more difficult for banks to engage third-party CICO outlets than it is for EMIs, provided that all transactions happen securely on the bank´s technology platform in real time.
Ignacio Mas is an independent consultant on mobile money and technology-enabled models for financial inclusion. He is also a Senior Research Fellow at the Saïd Business School at the University of Oxford, and a Senior Fellow at the Fletcher School's Centre for Emerging Market Enterprises at Tufts University. Previously, he was Deputy Director of the Financial Services for the Poor program at the Bill & Melinda Gates Foundation, and Global Business Strategy Director at the Vodafone Group.
Paving the Way for Capital: The Role of Technical Assistance in Mobilising Finance for Smallholder Farmers and Businesses27.10.2014,
Today, much of the conversation around smallholder agricultural finance is happening among an inspiring yet small group of social lenders and investment funds. These pioneering institutions have developed new products and disbursed millions of dollars in support of smallholder agriculture worldwide. However, as highlighted in Dalberg's recent report, an estimated gap of $400 billion still exists between demand and supply of finance to smallholder farmers. Without access to financial products and services, smallholders and agricultural enterprises are unable to purchase necessary supplies, expand production and increase their incomes.
There are several opportunities for non-lenders to play a more active role in closing this gap. Organisations that provide training, technical assistance and financial advisory services can help "de-risk" agricultural finance by offering farmers, cooperatives and small businesses capacity building and advisory services. With local knowledge of smallholder realities, expertise on value chain dynamics and established in-country networks, these organisations are uniquely positioned to offer multiple benefits to stakeholders throughout the financial ecosystem. By providing training and capacity development, they help smallholder farmers and small businesses understand, forecast and communicate their financial needs to potential lenders and investors. By designing and implementing transparency tools and processes, they help lower transaction costs for financial institutions and often serve as their "eyes and ears" before and after investment. Based on insights from regional projects in value chains such as cashew, cocoa and coffee, we identified four scalable approaches for how technical assistance providers can increase access to financial products and services for small farmers and businesses while reducing risk for capital providers.
1. Agricultural value chains and market systems can be strengthened through programs that develop capacity, promote market connections and improve business environment. Organisations can operate as a catalyst to strengthen agricultural value chains and market systems. These programs often begin with a value chain assessment and an industry strategic plan to determine pathways for growing a sector, addressing market failures, identifying and quantifying opportunities to benefit producers. Financial institutions can use these analyses as blueprints for expanding lending into new and unfamiliar markets.
2. Develop a pipeline of investment-ready clients. In order to prepare clients to access growth capital, technical assistance providers can offer pre-investment training including helping cooperatives and small businesses to develop business plans, improve operational efficiencies, build financial models to forecast revenues and cash flows, assess appropriate capital requirements, and provide transaction support in applying for loans or negotiating contracts. Technical assistance providers can also play a valuable supply side role by training bank analysts and loan officers on the economics of agricultural value chains. Lenders can then better evaluate financial health and viability of potential clients, as well as more efficiently structure investments, deploy capital and monitor performance.
3. Build data-sharing tools to promote transparency and streamline due diligence and monitoring. Agricultural finance continues to suffer from an information gap that drives market uncertainty and limits efficient capital flows. Recognizing the lack of cost-effective tools to collect, analyse and track information about client performance, many organisations have started to develop their own in-house mobile and cloud-based platforms to deliver real-time data to lenders and buyers. As the market continues to evolve, consolidation and efficiency gains can yield even more cost-effective and broadly applied solutions.
4. Design specialised risk management solutions. Risk is inherent in agriculture, but technical assistance providers can help mitigate this uncertainty by bringing together market players with skills and resources to design loan guarantees, risk-sharing models and matching funds based on appropriate incentives. When such mechanisms are structured along-side technical assistance and with the long term plan for any exit of donor and subsidy support, these mechanisms can lead over time to sustainable financial solutions for smallholders and small businesses.
Depending on their financial health and objectives of its clients, TechnoServe integrates the above approaches into its programmatic activities. Where appropriate, we provide our clients with simulation-based financial literacy training through our "Farming as a Business" and "Keys to Financial Success" curricula. Beyond training, TechnoServe's field-based network of more than 600 full-time business advisors and farmer trainers work hand-in-hand with farmer organisations and small businesses, helping to strengthen their operations and become more profit-oriented.
For example, building on an industry strategic plan developed for the East Africa coffee sector, which formed the core component of TechnoServe's Coffee Initiative, the program helped aggregate production from nearly 200,000 farmers and supported farmer cooperatives in building and upgrading 285 wet mill businesses. During the first four years, the program provided critical advisory on product quality and sustainability standards to the participating wet mill businesses. To address the lack of transparency in the local value chains, TechnoServe launched CoffeeTransparency.com, a cloud-based platform that delivers real-time data to lenders and buyers. During the harvest season, the system is populated daily with SMS reports from more than 80 coffee wet mills in Rwanda and Ethiopia. Four financial providers subscribe to the system, which has reduced the costs and logistical constraints of rural finance by offering powerful financial and performance metrics comparable over time and across clients. In 2013 alone, this system helped more than 50 cooperative and private coffee wet mills in Rwanda to access more than $3 million of working capital. In parallel, in Ethiopia where financial landscape is particularly challenging, TechnoServe established a new risk-sharing partnership between the International Finance Corporation (IFC) and Nib International Bank, one of Ethiopia's largest private commercial banks. With a $10 million risk sharing agreement from IFC, Nib has made available a revolving loan facility to more than 60 coffee cooperatives, reaching 45,000 farmers. As a result of the integrated approach, TechnoServe clients were able to access $38 million in long-term credit and working capital over just the first four years.
The presence of technical assistance providers in certain farming systems or value chains can play a critical role in incentivizing lenders to engage in smallholder finance. Buyers and traders are also more willing to extend financing when a technical assistance provider is involved, particularly when the duration of technical assistance and financial exposure is aligned. When delivered effectively, collaboratively and with a long-term vision, technical assistance to farmers, cooperatives and small businesses can pave the way for increased capital flows from financial institutions.
However, it is all too common that either capital is available and technical assistance is not, or vice versa. What is needed is a coordinated approach that links provision of capital to provision of technical assistance. This must be addressed in ways that incentivize the respective institutions to work together to benefit smallholder farmers and agricultural enterprises. Over time, this will unlock new income-generating opportunities for rural communities and help to close the smallholder-financing gap.
TechnoServe is an international non-profit development organisation headquartered in Washington, DC. Since its founding in 1968, TechnoServe has successfully used a private enterprise approach to assist low-income people in the developing world to build and strengthen sustainable businesses, industries and the enabling environment. Over 46 years, we have been a trusted partner with corporate, foundation and public development partners, implementing diverse value chain, market-led agriculture development, and entrepreneurship capacity building programs. For more information about TechnoServe please go to www.tns.org or email A2F@tns.org.