When you think of Oxfam, you probably think of aid and grants. There is certainly a place for that in humanitarian and campaigning contexts, but does ‘free money’ provide the right incentives when applied to economic development and sustainable livelihoods? Alliance invited Oxfam’s Malcolm Fleming to talk about the charity’s Enterprise Development Programme and how it blends commercial and social approaches to deliver sustainable change.
Oxfam’s Enterprise Development Programme (EDP) aims to lift over a million people out of poverty in a sustainable way by working with enterprises and improving the environment for business and investment.
Focus on SMEs
We have a growing portfolio of small to medium sized enterprises (SMEs) in countries such as Colombia, Haiti, Liberia, Tanzania, Sri Lanka and Indonesia. These enterprises are typically involved in the marketing of agricultural produce to regional or national markets. They are supplied, and partly or fully owned, by farmers and farmers’ cooperatives. The EDP uses the development of each enterprise to drive a mix of economic, market and social change, seeking to ensure that the economic gains are spent in the household and within the local community on development priorities such as nutrition, health and education.
While finance tends to be available for single entrepreneurs (through microfinance) or large, established corporates (from banks), SMEs are too large for the former and considered too small and risky by the latter. Also, while there are a number of initiatives that now recognize SMEs’ importance to sustainable economic development and seek to channel finance and business assistance to them, the vast majority of them see agriculture as one of the riskiest sectors in development, and therefore avoid it. We know, however, that investment in women, agriculture and rural enterprises is crucial to lifting remote rural communities out of poverty. We are working with these communities to realize, develop and grow commercially viable enterprises, and calling for increased attention to this sector through advocacy and demonstration.
Our commitment to women’s leadership in the businesses is unequivocal. Women in Africa produce 80 per cent of the food, yet receive only 10 per cent of the finance. They are often relegated to low-margin activities with little involvement in economic organizations and no control over their earnings. Supporting them is an end in itself, while their increased control over resources also leads to higher spending within the household and the local economy.
Loan-based finance is essential for the promotion of enterprises for a number of reasons: relying exclusively on grants can diminish the entrepreneurial spirit and it can create unfair competition or disincentivize other financial services providers that might otherwise support local businesses. Businesses need to sustain themselves beyond the short-term support Oxfam can provide, and soft loans and guarantees enable the progression to commercial finance. Finally, the repayment of loans allows Oxfam to recycle the funds.
Loan finance in practice
We do not lend directly to the enterprise (legal reasons prevent this in some countries), but instead seek to partner with a local bank, microfinance institution or credit union (more often the latter two), which will have far more expertise than we do in managing loans. If, by working with us, they can be convinced of the commercial value of investing at this level, they will have developed both the skills and the willingness to lend to others.
We have developed two types of contract for use with financial intermediaries (FIs). The first is a management/services agreement, where the FI acts as the agent for Oxfam, lending the money on to a particular group at particular terms, often keeping a deposit to cover a percentage of defaults. The second, less frequently used type is a loan agreement through which Oxfam straightforwardly lends money to the FI, though this arrangement only works with very specialized institutions and has the disadvantage that Oxfam loses any influence over the relationship with the enterprise. We are still learning and refining our procedures.
Recovery and returns
Our first loans were disbursed in late 2008 and early 2009, to run for 2-5 years, so we cannot provide information on repayments yet, but monitoring shows that the businesses are on track. The money raised for the pilot phase of the programme is from donations. Our aim, in the longer term, is to establish a discrete loan fund that would return at least the capital invested, and to offer supporters the option to loan on those terms.
We always look to exit, usually after 3-5 years, once the business has built both the track record and the capacity to access commercial finance. We use loans to instil the commercial principles that will build that capacity and encourage financial intermediaries to charge rates of up to 10 per cent.
The main challenge we see is not so much in getting the loans back but in overcoming currency depreciation. The programme raises money in the UK in sterling, while loans in country can normally only be in – often volatile – local currency.
Mixing investments to overcome poverty
Loan finance is one essential part of an intelligent mix of investments that EDP makes in each enterprise. It covers items such as working capital, fixed assets and other business-related expenses. This is accompanied by technical assistance to build capacity, reduce risk, and ensure the sustainability of each business. This might mean using grant funding, for example, to cover salaries of new specialized staff – we usually do this on a diminishing percentage, say, 50 per cent in the first year and 25 per cent in the second, until the enterprise is able to bear the costs fully. The development of each enterprise is used as a platform for wider change, which includes addressing the economic, social and cultural barriers that exclude women and other marginalized communities; building producers’ capacity to participate; and building each enterprise’s capacity to leverage wider market change by influencing government policy on agriculture, trade and rural investment. Much of this additional investment is grant funded, too.
The overall split for approved investments in our current portfolio of 11 is 36 per cent loan, 32 per cent grants to business and 32 per cent grants for local management and delivery of the policy and social change, though in terms of the purely business aspect, the proportion of loans to grants increases over time increases to around 70 per cent depending on the nature and scale of the business.
It is important to recognize that investing in remote agricultural-based enterprises will remain risky for a commercially minded investor. This is why the provision of complementary public or philanthropic risk capital is essential.
Enterprise development as partnership
EDP has an investment committee comprising internal and external business and development experts which undertakes detailed due diligence of proposals. These are assessed for commercial viability and their ability to integrate women’s economic leadership, revitalize local economies and improve market services. Enterprises must show how they will achieve sustainability and scale, applying business principles and using the right combination of loans, grants and guarantees to fund activities.
The strongest proposals are then put to the Enterprise Development Board for final review. Once in the portfolio, businesses continue to be supported and their progress tracked. This ‘remote’ support is complemented by local business development partners and mentors identified by the enterprise and therefore easy to access. Mentors are encouraged to act as ‘critical friends’ and may either help to address a specific business issue or more generally mentor the management team.
Measuring business as well as social impact is key. We use quantitative metrics to measure business performance, income and job creation, while also looking at changes in the role of women and in the household economy. Our aim is to show that investment in this sector, through the adoption of an integrated socially inclusive approach, though potentially riskier, will deliver high social, economic and market returns.
Tackling the SME sector in the developing world is key to creating economies that can grow and flourish. This is a massive task and requires collaboration between public and private sector stakeholders to create markets that work for poor people and to help them break down the barriers to participation. Our ultimate aim is to drive more private, institutional and public investment into socially inclusive, agriculturally led, rural enterprise. Applying the right mix of finance will be crucial to creating the case. Neither loans nor grants on their own will do this, but properly targeted grants, used in combination with loans and other business inputs, just might.
Malcolm Fleming is Business Development Manager at Oxfam and one of EDP’s key architects.
The Assosa Farmers’ Enterprise in Ethiopia
EDP is loaning £36,750 to the Assosa Farmers’ Enterprise in Ethiopia to set up an edible oil processing plant and £33,075 to finance the working capital. The plant will allow them to create jobs and secure higher income for everyone in the value chain. Another £19,175 is provided to increase management capacity and £31,875 for project management, monitoring and specific support to women, all in the form of grants. Crucially, in addition to increasing their involvement in the company, women, who are traditonally excluded from decision-making and economic opportunities, will receive additional training and support to take on an exclusive role in the marketing of the sesame oil in the local area.
From left to right: Mergia Bekele, mentor and founder of Yonad Business Promotion; Mulugeta Tefera, General Manager of Assosa; Yimegnushal Mesganaw, Chairwoman of the Women’s Association.
Comment John Kingston
I welcome the exploration under way in this programme at Oxfam. Social investment – the use of money to achieve a mix of social impact and some financial return – is developing rapidly as a way of using philanthropic capital.
The Gates Foundation’s Social Investment Fund is the most recent indication of this fast-emerging source of capital funding. Microcredit is the best-known example, initially underpinned by grant capital but now using commercial debt.
Lots of realism and practical action is the way forward. So, it is realistic to have a three-way split of loan, technical assistance grant and project support grant. It is also realistic to tell investors that even the loan element, at this early stage, is actually grant money with an expectation of some level of repayment. It is as yet too optimistic to talk of 100 per cent loan repayment, and supporters should be content to see funds stay in local currency for recycling to the next local enterprise. However, the message to the businesses receiving loans should be different, to avoid confusion and loans morphing into grants.
Above all, Oxfam should learn from both success and failure, and publish its research and development findings. Others can then learn, and adapt or copy to increase the access to ‘mini-credit’ for farmers and other entrepreneurs.
John Kingston is chief executive of Venturesome. Email firstname.lastname@example.org