Nurturing Entrepreneurs through Micro-Investments

06/01/2011

 

The microfinance industry has come under intense scrutiny over the last several months.  Once dubbed “the silver bullet” of poverty eradication by the mainstream media, development organizations, and governments, alike microfinance as an industry is in turmoil.  While we don’t intend to enter this debate at this point, we found this recent article in the WSJ quite enlightening.  

Development economists, most prominently those associated with J-PAL and IPA, have been running randomized control trials on a number of development issues, including microfinance.  Their research has given those in the microfinance industry some serious food for thought.
In a recently released book, “Poor Economics” by Abhijit Banerjee and Esther Duflo, the two MIT economists explore a critical question in the microfinance space; why doesn’t microcredit create more entrepreneurs?   One reason the economists point to is the rigidity of microfinance loans.  Most microloans are fixed rate loans with maturities of 3 to 12 months. Typically borrowers pay back their loans with principal and interest payments as soon as a week after loan disbursement.  This does not make business creation or expansion easy. Imagine what that kind of payback schedule does for a inventory-heavy business, like retail, or a business seeking to invest in equipment or capital goods.  More than likely they will have to set aside portions of their loan balance to make the first few payments.  This is an inhibitor to growth and an impediment to be able to tap the economies of scale that can make their business’ more profitable.

This question of rigidity in financing is at the core of InVenture’s mission and our development philosophy.  We address the barriers to self-sufficiency and business growth through our unique model of connecting emerging micro-entrepreneurs with appropriate financing through unsecured equity-like instruments, or “quasi-equity.”  Micro-entrepreneurs pay back their investments through a profit-sharing plan, which is calculated from their monthly net profit.  This structure gives the micro-entrepreneurs flexibility by allowing business to pay back funds in line with their growth.  Unlike traditional debt products, InVenture’s profit sharing structure aligns our interests with that of the micro-entrepreneur.  InVenture and its InVestors are only repaid, if the business actually succeeds.  In this we become partners with micro-entrepreneurs, not merely their creditors. We feel this structure relieves some of the natural tension between entrepreneurship and traditional microfinance.  

- Tom (Portfolio & Finance Director)