Alfred Watkins, singularityhub.com
Funding Projects With a Better Financial Plumbing System
All is for naught without the funding to make it happen (and keep it happening).
At a July 2015 meeting in Addis Ababa, Ethiopia, the UN encouraged “long-term institutional investors, such as pension funds and sovereign wealth funds, which manage large pools of capital, to allocate a greater percentage to infrastructure, particularly in developing countries.” In the wake of the pronouncement, the World Bank, IMF, and other multilateral development banks outlined plans for increasing public and private investment flows for sustainable development from billions to trillions of dollars.
This is all fine from a macro perspective. But practically, how will we get these financial resources to individual “last mile” communities and households who need finance in much smaller increments than billions or trillions of dollars? In other words, how do you scale up financial mobilization from billions to trillions and then build a financial plumbing system with conduits that can deploy these funds in the thousand- or million-dollar increments needed to finance tangible projects on the ground?
Several innovative solutions to what was viewed as an intractable problem are underway.
Shared Interest, which operates in Southern Africa, guarantees loans from local commercial banks to last mile consumers, producers, and enterprises. Its $29 million in guarantees has resulted in commercial bank loans totaling $122 million to economically marginalized borrowers. Shared Interest operates as a stand-alone, financially viable not-for-profit financial entity. It charges fees for its guarantees, raises capital from socially-minded private investors, and has made every scheduled interest payment to its investors. Credit Ease bypasses the commercial banking system altogether and lends directly to last mile rural customers. The company uses money transfer and bill paying histories in cell phone records to generate a credit score, which seems to be as reliable as more traditional “standard” credit scores.
Laura Koch from Ignite Power and Syed Farhad Ahmed from Aamra Group explained how regular, timely payments via the cell phone banking system not only allow their customers to obtain rooftop solar power and Wi-Fi services but how they also enable their customers to generate a cellphone-based credit score. This, in turn, enables them to borrow from a new class of fintech lenders such as Credit Ease as well as directly from technology vendors and solutions providers like Ignite Power.
In designing new financial conduits for last mile deployment programs, it is important to answer a simple question: Who is the borrower for each specific project? At first glance, the answer would appear fairly obvious. If a household needs a rooftop solar installation or a franchisee wants to start a potable water enterprise, the most likely borrower would seem to be the household or franchisee. However, real-life situations are not always this straightforward. Deployment requires a diverse array of financial conduits.
For example, in the Jibu franchise model, Jibu provides the franchisee with equipment, training, marketing, and other business services. Jibu, in other words, finances the franchisee who repays Jibu over time with an agreed share of sales revenues. Ignite Power pays up front for the entire cost of purchasing and installing roof solar panels on household rooftops. In effect, the household receives a microfinance loan from Ignite with the solar panel acting as collateral. Affordable monthly payments of $4 to $5 per month from each family to Ignite pay for the home solar panels. After two years, the family owns the solar panels and makes no further payments to Ignite.
The Safe Water Network delivers potable water to last mile consumers who pay only for the water they consume and therefore do not need finance from either Safe Water Network or other financial intermediaries. To fund its activity, Safe Water Network initially raised capital from charitable grants. However, to finance future expansion it may raise capital by securitizing profits generated by the initial expansion.
These and other examples show how creative approaches can circumvent bottlenecks in traditional financing, and added to strong entrepreneurial strategies, give projects a better chance of success.