NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

MCE Social Capital (MCE) was recently selected to receive $3.7 million in assets from the Deutsche Bank Microcredit Development Fund (DBMDF). Of the Board’s selection of MCE to receive the assets, DBMDF President Gary Hattem said “We were looking for a strong, mission-aligned organization and chose MCE because of its excellent reputation and track record, the powerful multiplier effect that its model produces, and the positive social impact it has had in some of the most challenging places in the world.” MCE will use the funds to expand its lending to small and growing businesses (SGBs) in developing countries (this video highlights MCE’s work with SGBs).

SGBs are the dominant form of entrepreneurial activity in emerging markets, and they hold the potential to transform communities and alleviate poverty through the jobs they create and the essential products and services they offer. But they often find themselves in what’s known as the “missing middle”—a funding gap that businesses fall into when they need more capital than microfinance institutions can supply but less than what banks and other institutions will finance. This is especially true in areas with high levels of extreme poverty, like rural, sub-Saharan Africa.

MCE fills this gap by providing loans to rural enterprises in smaller amounts, at affordable interest rates and on flexible terms tailored to their business needs. The key—and what makes its model unique—is MCE’s use of philanthropic loan guarantees. These enable MCE to access financing from banks, development finance institutions and impact investors, which MCE then uses to make loans. Loan repayments to MCE are recycled into new loans to promising enterprises and any loan losses are covered pro rata by its guarantors.

Grant will help MCE more than double its SGB loan portfolio

By leveraging the grant, MCE plans to grow the SGB portfolio from $5.5 million today to over $12 million by the end of 2021. MCE will use the distribution as matching funds to attract additional guarantors. The grant will provide 50% (on average) of the funds for each new SGB loan MCE makes moving forward, matching the funds MCE raises based on its guarantee model.

“Moving forward, each guarantor that joins MCE’s SGB portfolio will not only enable MCE to access and continually recycle loan money obtained using their new guarantee, but also an equal amount of the capital from the DBMDF grant. This doubles the guarantor’s and MCE’s impact. MCE will be able to expand our SGB portfolio much faster than we could otherwise,” said Gary Ford, CEO of MCE Social Capital.

Expanded lending builds on success with SGBs

MCE has special expertise in lending to agriculture value chain companies, where the need is great and the potential for impact is high. MCE will use most of the funds to make loans to companies such as a business in Zambia that improves the livelihoods of smallholder farmers by providing access to quality inputs, technical assistance, and larger markets.

MCE launched its SGB portfolio in February 2017 after it won a $1 million grant from USAID’s Partnering to Accelerate Entrepreneurship (PACE) Initiative. The portfolio is backed by loan guarantees from a pool of over 20 philanthropic guarantors. When borrowers default, losses are shared pro rata across the guarantor community, and guarantors typically count the losses as charitable contributions to MCE. A signature from a guarantor supporting MCE since its launch in 2006 has enabled over $2.5 million in lending. During that 14-year period, the guarantor has contributed to MCE only $45,000 to cover its share of portfolio losses, which have averaged less than 2% of total disbursements. That’s an almost 60x multiplier effect.

Photo courtesy of GotCredit.