Nilima Achwal

Impactful Ideas: Update on the G-20 SME Finance Challenge

As explained in a previous post by Manuel Bueno, the G-20 Summit, Ashoka Changemakers, and the Rockefeller Foundation have come together in a partnership that is likely to transform the way that we think about social change, by showing us the immense value in combining the political and legislative power of the world’s leaders and the creativity and ambition of the private sector. The G-20 SME Finance Challenge seeks to find companies with big ideas about improving financing for small to medium enterprises (SMEs), especially in the developing word, and the G-20 is committed to fully implementing the winning solution(s), through capacity building and financing.

“The G-20 SME Finance Challenge is distinctive because the G-20 wants to think smarter about how to use their tools to promote sustainable growth, by looking at innovators on the ground! That’s a new, exciting link. It portendsthe new wave of innovation,” explains Stuart Yasgur, Managing Director of Social Investment Entrepreneurs at Ashoka. Indeed, social innovation has increased drastically over the past several years, and governments are starting to take notice.

But why SMEs? SMEs actually play a crucial role in economic growth, and not just in top-down development. They employ communities and promote economic equality, reducing the probability of political unrest. These business owners are the very fabric of their societies, embodying everything that is middle class: aspiration for upward mobility, a belief in their own abilities to create something new, and most distinctively, the access to opportunities needed to grow.

Poorer business owners often do not have the means to employ more than a few people, while SMEs have the ability to transform their communities by providing work. At the same time, Yasgur explains, “SMEs normally have stronger links to their communities and to the people that they serve”, making them more likely to create real value, unlike many large corporations that exist solely for profit. Especially in the developing world, many SME owners demonstrate that supporting their local economies and communities is important to them.

However, most SME owners have difficulties in accessing the capital needed to reach their full potential, and sometimes flounder and fail in their initial stages. Caught between needing more capital than afforded by microfinance and having fewer securities than demanded by commercial banks, many SMEs often struggle to succeed. In addition to the scope of financing, the kinds of financial products being offered often don’t align to the real potential of SMEs.

For this reason, hundreds of entrants have flooded the competition with innovative, new, forward-thinking approaches to SME financing. Some companies came up with quasi-equity products, like revenue-sharing schemes, for better alignment of investors with borrower needs. Another, Ashoka Changemaker’s early-entrant winner Affinity Macrofinance, merges the private and public sectors in a surprising way.

David Stevens and Marianne Pellegrini of Affinity Macrofinance initiated a loan program that utilizes local currency, in the form of guaranteed, development bonds, to inject capital into developing economies. Stevens came across this idea while working in Chile-the country couldn’t finance a national toll road construction project because the toll road bond did not meet the requirements of its national pension funds, which could only hold bonds of the highest rating.

However, Stevens helped the Chilean government by insuring, and thereby converting to AAA risk, the bonds that the national pension funds purchased. In that way, Chile was able to fund its toll road construction using its own pension assets and without relying on foreign lending, which would have exposed Chile to currency risks it could not afford.

Now, Stevens hopes to use the same concept to leverage the estimated $1 trillion in untapped pension fund assets residing in the developing world. His initiative will facilitate the issuance of low cost, local currency, long-term bonds that will be guaranteed by another nation. Though the nation provides guarantees, no actual capital will be expended, allowing countries to be self-reliant. The guarantees also allow Affinity Macrofinance to issue the bonds at low interest rates, which will be helpful to SMEs.

Affinity shows an interesting combination of public and private sector involvement that ultimately helps SMEs in the developing world. Yasgur comments, “We’re in the emerging days of an exciting transformation. Governments are playing a large role in thinking about the role of finance in creating social as well as economic value. This competition is a milestone.”

Another entrant, Biz2Credit, noticed that SME owners often didn’t have CFOs, aren’t informed of their best credit options, and were bombarded with too much information. At the same time, he noticed that banks spent large amounts of money acquiring businesses and weren’t targeting the fastest growing segment market, businesses owned by Hispanics and South Asians. These business owners often had no experience with credit, having hailed from nations where credit was tight.

So, CEO Rohit Arora decided to create a simple, easy online platform where SME owners can be matched with appropriate banks, fill in and view all documents online, and improve their credit worthiness. The website does this by inputting entrepreneur needs and the underwriter requirements, allowing them to search for each other. This reduces costs for banks, too, by shortening the time period from 8-9 weeks to 3-4 weeks to find a trustworthy entrepreneur and lend capital.

Now, Biz2Credit has facilitated $300 million in credit to 25,000 small business owners in the US, and has recently expanded to India, where it is working with the Indian government and credit rating agencies, and has plans to tie up with a media company to reach entrepreneurs in their regional languages. It will also shift in another key way-it will reach entrepreneurs through regional offices, instead of through the Internet, since many users are still wary of online transactions. It also hopes to develop a mobile phone platform soon.

It’s also important to keep in mind the other, more subtle barriers to the springing up of SMEs across the world, including a paucity of role models and encouragement of entrepreneurship. Assisting young people to start ventures, as Ashoka does, is one solution. But as this competition shows, once we are conscious of the problems, a thousand solutions can emerge.