Wednesday
December 15
2010

Tayo Akinyemi

iuMAP: Milaap Bridges the Gap for Microfranchisors

Editors Note: This blog post is the second part of a series on financing distribution networks from Ayllu, developers of the iuMAP, a web-based social enterprise directory launched in media partnership with NextBillion. You can help increase iuMAP’s size by submitting social enterprises and giving feedback. The first post in the series can be found here.

Getting the finance right is key to implementing a successful microfranchise model. In fact, it’s often about mitigating the risk of the microfranchisee. When an entrepreneur wants to sell a highly desirable product, a solar lamp for example, product acquisition can be tricky. First, the capital investment is expensive. Secondly, it involves risk; if the entrepreneur fails to sell her inventory, she’s stuck with the liability. What’s needed is a financing mechanism that reduces the risk borne by the already vulnerable entrepreneur. That’s where an organization like Milaap comes in.


Founder Anoj Viswanathan was inspired by his work with the business development team of SKS Microfinance. From 2008 to 2009, he helped customers gain access to water purification units and solar lighting. Through this experience, Anoj realized that the potential for social impact was great, but the missing link was access to capital. Unfortunately, mainstream investors wouldn’t touch the problem. Despite these challenges, the team realized that a Kiva-like model – crowd-funded low-cost, risk-tolerant capital – could inspire new models in microfinance. And so Milaap was born in June 2010.

Here’s how the Milaap model works. Like Kiva, Milaap takes zero-percent interest loans from online users, puts them to work, and acts as an intermediary. The capital Milaap raises is fed into a network of field partners who underwrite the risk of repayment and lend to the borrower. Milaap says it provides the capital at a cost less than half of the current financing costs of its field partners, most of whom cannot even access capital from traditional sources. Thanks to this ecosystem, Milaap can track capital all the way through the value chain.

There are a few distinguishing characteristics of Milaap’s model. For example, Milaap takes special care to design loan products that meet its clients’ needs. Additionally, it focuses on microfranchise organizations with emerging business models, specifically those between the post pilot and commercial funding phases of development. Finally, within these parameters, Milaap is agnostic in terms of field partners, products, and business models, which makes it an ideal “pipeline partner.” However, Milaap prefers to work with organizations that have built good relationships with their borrower base and are exploring ways to lower their capital costs, eventually to pass on the benefits to the end borrowers.

How did the Milaap model emerge? First, the launch team conducted research into the cash flows of micro-entrepreneurs. They discovered that loans charged at 10-14% were ideal for a month-long billing cycle. Milaap was able to provide lower rates because its capital was crowd-sourced at 0% interest (down from an initial trial interest rate of 1.5%). This drastically reduced the cost of capital for the field partner, which eventually launched the program at a 12% rate to the rural entrepreneurs.

Having only launched in June 2010, Milaap is still in a very early stage, but has already learned some valuable lessons from its initial set of entrepreneurs, who are employees of Sakhi Retail, a subsidiary of Swayam Shikshan Prayog. For example, one problem in Indian microfinance that has recently received a lot of publicity is borrowers using new loans to pay off pre-existing ones, rather than for their intended purpose, in this case, to finance their business. They confronted the problem by handing a check, issued in the name of the microfranchisor, to the entrepreneur in lieu of cash disbursement. This ensured that the money could only be used to purchase inventory. Entrepreneurs are also required to supplement external investment with a personal investment in order to secure buy-in. The initial group comprised 8 borrowers, who with their success would provide the vital word-of-mouth support, essential to the success of any program in rural India. About 30-40 new entrepreneurs have since expressed interest, and Milaap plans to scale up from the original test group in January 2011.

So how’s Milaap doing in real terms? Though obviously it has just started up, a strong indicator of success is its repayment rate, which is 100% thus far. Entrepreneurs are re-investing capital in their businesses and the sales cycle is outpacing the billing cycle, which creates a higher capital rotation. This is important because BoP consumers can be fickle. In order to exploit demand, one has to sell inventory immediately. With access to capital, it’s possible to acquire a larger inventory and not lose time re-stocking. This means higher cash flow and more revenue generation for entrepreneurs.

All in all, it seems like Milaap has launched a high-potential hybrid social enterprise model. The web platform development, marketing, communications, and fundraising are managed through a for-profit arm to ensure operational efficiency. A nonprofit arm provides capacity-building to field partners, assisting with tasks like social impact assessments and other field issues that at times are best managed with the double bottom-line in mind. Only time will tell whether Milaap can scale up and scale out.

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