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 that has plagued other microfinance organizations. Part Two looked at how Balloon offers more than just financial product by analysing the consultancy and education support that Balloon offers whereas most microfinance organizations focus only on financial support.
A lack of focus on growth
Providing financial and non-financial support is all well and good but there is a need to ensure that businesses grow beyond start-up. Developing countries’ economies are made up of a large number of microenterprises (mostly informal) and some large firms but very few small and medium sized enterprises (SMEs). Conversely, in developed economies, SMEs make up the majority of the economy.
The World Bank estimates that SMEs account for 50% of GDP and over 60% of employment in developed economies, but in low-income countries they are less than half of that: 17% of GDO and 30% of employment. This problem is often referred to as the ‘missing middle’ problem. Most development institutions regard SME creation as a fundamental pillar of development.
Analysing how to grow SMEs in this context is a complex problem. However, there is little doubt that the same ingredients required to grow a business are also necessary for scaling one. These include, access to increasing finance, and ongoing support in terms of business knowledge and skills.
In terms of finance, there are already a wealth of providers in this space however none quite meet the needs of growing informal sector businesses. While SMEs are the traditional customers of banks, supporting micro-enterprises to grow into this space is not something banks are comfortable doing. The risks associated with backing these entrepreneurs is sizable due to the amount of capital required. At the same time, business plans are sufficiently complicated enough to be expensive to evaluate. In essence the costs outweigh the potential benefits. When the advanced economies were faced with similar problems in the 1990s, banks turned to evaluating individual entrepreneurs (through references, credit history, etc.) rather than business plans. However, as this is much harder in emerging economies (due to lacking infrastructure), it does not offer banks in these countries the same opportunity.
Therefore, informal sector entrepreneurs are reliant on MFIs to support their growth. However, MFIs maintain a large informal sector because their business model depends on it. MFIs require a high volume of loans to be profitable. If this sector were to be consolidated into SMEs their market would essentially be wiped out. Therefore, there is no incentive for MFIs to support the growth of micro-enterprises.
As for the second ingredient, continuing business education or skills development, the institutions that offer this, do so in a scattered way. In essence, entrepreneurs are faced with a landscape of disconnected interventions. Business schools, sectoral organizations, private companies, NGOs, charities, MFIs and banks all offer courses, workshops, and programmes at various levels.
Of course, none of these are tailored to entrepreneurs needs and so it is left to the entrepreneur to navigate through these trying to identify what they need and when. This relies on entrepreneurs having the time to do so, but also the awareness and insight of their current challenges and the potential solutions. In our experience, this is rarely the case.
Scaling Impact Through a Focus on Growing Businesses
The Balloon process is designed to help micro-businesses scale to SMEs. We do this through sequential programmes that offer support and finance at a level which matches the entrepreneur’s current needs.
Entrepreneurs start with us on what we refer to as our Stage One programme. Facilitators on this programme are typically undergraduate students (or equivalent) who deliver the basics of the Balloon curriculum to entrepreneurs. Loans offered are typically capped around £350.
Our Stage Two programme matches entrepreneurs with postgraduate students or young professionals in their first year or two of work. The curriculum evolves to include concepts like sustainability and opportunity prioritisation. The finance on offer also doubles the previous stage.
Stage Three matches entrepreneurs with experienced Facilitators from sectors such as consulting and finance. This curriculum focusses more on growth and risk management. As in Stage Two, the finance offered at this stage is double that of the previous stage.
Unlike MFIs, as our revenue is not generated by entrepreneurs we have no qualms with this sector shrinking. Instead, as it is an important part of our impact metrics, we celebrate growing businesses! Growing businesses have an impact on the entrepreneur and their family but also on the broader community. Growing businesses create jobs, increase demand for skilled labour, and offer valuable products and services to customers.