Wanted: Smart, Creative Capital
Last month’s “Cracking the Nut” conference, hosted by the development consulting firm AZMJ, focused on “Attracting Private Sector Investment to Rural and Agricultural Markets.” Throughout the sessions, it became clear that investment alone on the part of the private sector isn’t sufficient to transform these markets; private sector capital must be applied intelligently and creatively if it is to wield that power.
First, let’s begin to unpack the idea of smart capital with the discussion around microfinance in the break-out session “A New Approach to Agricultural Microfinance,” led by Maria Elena Querejazu of Fundacion Sembrar.
Recently, microfinance has come under a wave of scrutiny, but as Querejazu said in her break-out session, “if you know good [you] will do good business.”
Fundacion Sembrar brings staff with years of experience in the urban microfinance sector and combines it with strategic knowledge from agribusiness (such as success with in-kind loans) to create a new approach to microfinance in rural, agricultural areas in Bolivia. The organization not only provides farmers with loans but also technical assistance and connections to supply chains, providing the support to ensure loans are paid back. Speakers throughout the conference underscored the need for smart, hands-on investors to assist borrowers with capacity building and technical assistance, just as Fundacion Sembrar has done.
Fundacion Sembrar also takes a cautious approach to investment. For instance, the organization isn’t developing new products such as micro-insurance. Querejazu patiently explained that with climate change, there is no reliable historical data on which to base insurance models, and so micro-insurance is not a smart path of action for now. Another example of the organization’s cautious investment approach is found in their more selective approach to lending. For instance, Fundacion Sembrar requires farmers to have at least 20 hectares of land and to produce surplus before applying for a loan, a policy that pushes back on the notion that everyone is a potential customer for microfinance. Some people are better left out of these markets; to help them by not giving capital can be the smartest thing.
Other instances of smart capital on display at “Cracking the Nut” included a case study of the African Cashew Alliance and its contribution to traceability in the supply chain. The establishment of traceability capabilities (for regulatory reasons or consumer concern over health and environment) is opening doors for private capital in many supply chains through the creation of greater information systems that track product origin and note third-party certification of quality, health, and social standards. Banks and investors in these systems can access data on historical demand and product flow, expanding opportunities and reducing risk for financing.
In addition to smart capital, there’s also a need for creative capital. The Mennonite Economic Development Associates (MEDA) led a session on “Innovations in Market Research (for Rural Finance).” After noting that micro-finance institutions generally use a limited range of products to reach a very specific target group, thus saturating the market for these products, MEDA representatives argued that with creative approaches to the sector, avenues for growth will open. In relation to market research, this might include using old sets of data and information in new ways (“data-mining”) to create new products and also increase the efficiency of additional research. In relation to financing, this includes working to develop creative financing structures that satisfy the capital needs of farmers and the collateral demands of investors; the panel “Brokering Investment to Meet Market Demand in Paraguay” explored this example with a case study from organic sugarcane producers building a processing factory.
Old tools can often be used creatively in new ways to solve current finance and research problems, but sometimes completely new approaches are needed. For instance, in replacing paper questionnaires with tablet-based ones, MEDA has been able to more closely monitor the execution of field surveys to ensure greater accuracy and efficiency. Ideas42 (another conference speaker) is replacing value chain mapping with behavioral mapping and as a result is able to see how the adoption rate of services such as in-kind fertilizer loans varies based on when it is offered in relation to the harvest. These organizations know that the use of creativity is essential in understanding the needs of poor small-holders and can open the door for the next billion to become more active consumers and suppliers in international supply chains.
During his closing remarks on the first day of the conference, Nikolaus Eichman from AZMJ said “finance itself is not an end, it’s a tool.” The focus of “Cracking the Nut” was not only how to channel private sector investment into rural markets, but also how to ensure both financial returns and sustainable development impacts by applying intelligent and creative thinking.