Microfinance has failed to live up to its early promise as a tool to fight poverty. In this three-part blog series, we discuss the three major issues with current microfinance and how the Balloon model has addressed these. Part one of this blog series focussed on the financial products that Balloon offers, analysing how these are set up to avoid mission drift, a problem that has plagued other microfinance organizations.
Microfinance focuses too narrow
A second major reason why microfinance has struggled to have the desired impact is because it assumes that the only barrier to existing poverty is financial. However, poverty is a multi-dimensional problem and therefore its solution must be similarly multi-dimensional.
An article published in the Stanford Social Innovation Review (SSIR) clearly articulated this problem. The authors called for a shift from institution-centered microfinance to client-centered microfinance. This included moving away from solely providing finance to including financial education, business training, and value chain support. Health care, education and other social services were also recommended.
There are two components to this argument. The first is that finance alone is not enough to develop a successful business. The second is that even if entrepreneurs were to grow a successful business, other elements are required to lift individuals and their families out of poverty. Good health, access to nutritious food, and lifelong learning opportunities.
While the latter might be outside the realms of the MFI (although some innovative ideas have seen MFIs be involved in the provision of goods and services to address these needs), the former can easily be a central element of microfinance. This can include financial literacy, knowledge of business administration (e.g. record keeping), as well as strategic issues such as differentiation. Several studies have found that these additional services improve entrepreneurs’ businesses and also improve repayment statistics for MFIs.
Offering a wealth of added value on Balloon programmes
Balloon achieves much of this client-centred microfinance. As noted in the first part of this blog series, our financial products are designed with entrepreneurs in mind. This is just the tip of the iceberg. We provide considerable non-financial support to entrepreneurs as well.
On each of our programmes entrepreneurs are paired with what we refer to as Enterprise Facilitators. These are exceptional local and international youth who come from one of three sources:
- Volunteers recruited through the UK Government supported ICS programme
- Individuals recruited for the ‘Fellowship Programme’ – typically university students or recent graduates
- Corporate participants (e.g. consultants or finance professionals)
These individuals spend several days in intensive training in entrepreneurship, innovation and business design before supporting entrepreneurs to deliver Balloon’s mission. We use a ‘train the trainer’ model because this allows us to reach scale faster.
Facilitators visit entrepreneurs’ homes and workplaces to better understand the problems entrepreneurs face. Facilitators often use tools like the Business Model Canvas to understand entrepreneurs’ businesses and how to innovate within their existing business model. Concepts like the Strategy Canvas, and the Before and After Canvas help to understand innovations in the context of the broader market. Using the Lean Start-up Approach, working groups test some of the innovations generated using a minimum viable product.
This process delivers actionable recommendations to entrepreneurs to grow their businesses. It is not uncommon to find that entrepreneurs double or triple their revenue through a Balloon programme. Apart from delivering innovations, this processes give entrepreneurs a list of tools they can employ in the future to continue to grow their business. Similarly, working groups work hard to ensure that entrepreneurs are keeping accurate financial records as well as showing entrepreneurs how they can leverage these to grow their businesses.
In this sense, the Balloon programme often works as a form of consultancy and simultaneously business education. Both of these are critical to entrepreneur success and we have witnessed many failed businesses where these elements of an intervention are missing. As with our financial offering, the feedback from our entrepreneurs is that the non-financial support we offer is highly valued.