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Crowdfunding for Development: Recommendations vs. Reality

17.12.2014Samuel Raymond

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

Financial Inclusion Up Close in Rwanda

17.12.2014Douglas Randall

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.

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