Climate Lending to Franchised SMEs - a personal savings scheme that catalyzes green business

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Climate Lending to Franchised SMEs - a personal savings scheme that catalyzes green business

Madagascar
Website:
http://www.carboco.org/
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Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Online lending website that crowd-sources operating capital for franchised SMEs that generate carbon credits. Loans are repaid once carbon credits are monetized, usually after 2 years, with interest higher than bank rates. Consumer confidence in the scheme is guaranteed as loans are underwritten by the carbon financier, with whom the Franchisor has signed an Emissions Reduction Purchase Agreement.

About Project

Solution: What is the proposed solution? Please be specific!

We offer Western consumers the opportunity to mitigate climate-change by (micro)lending risk-free to SMEs in developing nations. This earns consumers higher interest than if they keep their savings in the bank, protects the environment, contributes to poverty-reduction and catalyzes economic development. The loans provide a unique source of working capital to SMEs, enabling them to earn carbon revenues now beyond their reach by implementing a standard franchised business model. For this they are currently unable to raise money from local banks due to carbon market complexities and transaction risks that are instead taken on by the Franchisor (CarboCo). Franchise examples: 1) Sale of fuel-efficient-cookstoves or solar-home-systems to poor urban consumers that cook on charcoal from natural forests or use kerosene for lighting. These products are expensive and need to be subsidized before they can be sold in large numbers. This necessitates a working capital loan, until revenues from carbon credits repay the initial investment. 2) Plantations of fast-growing tree or bamboo on degraded/non-agricultural land for the purpose of growing fuel wood/charcoal, or for permanent (re-)afforestation. SME finance is needed to access land, seedlings and to manage the plantation until carbon credits are issued. Because the businesses are standardized and based on proven models that guaranty carbon reduction, future SME carbon revenues are underwritten by CarboCo's Carbon Financier. A revolving insurance scheme protects against SME under-performance and provides unparalleled protection for the online lenders’ investments. In combination with market-rate interest payments, this makes this online lending website unique and highly attractive.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

* Directly linking western consumers and their savings to SMEs in developing nations. * Making it possible for Western consumers to 'ethically bank' their money safely in return for attractive interest - whilst their money 'works' to protect the environment. * Job creation: each SME franchise will generate 5 full time and 30 part-time jobs. * Poverty reduction: each SME carbon franchise will implement business activities that reduce household expenses for poor consumers that buy their products. * Health benefits: most carbon franchises deliver important health benefits to target consumers (e.g. improved cookstoves and solar lamps reduce indoor air pollution which causes respiratory disease). * Economic development: SMEs will grow profitable, tax-paying businesses. * Important environmental benefits are generated through reducing CO2 emissions; by reducing deforestation through reducing the consumption of charcoal sourced from natural (rain) forests.
About You
Organization:
Carbon Impact Limited (CarboCo)
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About You
First Name

Adriaan

Last Name

Mol

Website

http://www.carboco.org/

Your Organization

CarboCo

Country

, NA

About Your Organization
Organization Name

Carbon Impact Limited (CarboCo)

Organization Phone

+261 3302 21405

Organization Address

Rue de l'Institut, Ebene

Organization Country

, PU

Organization Type

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below

Developing nations

Region(s) your solution focuses on:

Africa, Latin America and the Caribbean, South Asia.

Range of turnover in your target firms, in USD

Less than $1 Million, $1-5 Million.

Average turnover in USD of your target firm

750,000

Number of employees in your target firms

5-24, 25-49.

Average number of employees of your target firm

20

Specify the size, average and range of expected loans or investments in each target firm

The investment needs and administrative complexity of projects that generate CER/VER carbon credits is high even for simple initiatives. This prevents SMEs from starting profitable, climate-saving ventures. CarboCo developed a proprietary Franchise that centrally manages carbon transactions on behalf of SME Franchisees that implement standardized CO2-saving businesses. The investment / working capital requirement for a typical SME franchise is $750,000. This amount, multiplied for each participating SME, is crowd-sourced through the Climate Lending website - and returned with attractive interest once carbon credits are paid out. Part-franchises are allowed, and multiple projects will run in parallel as finance/business volume grows.

What stage is your solution in?

Operating for less than a year

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

This venture leverages public funding and the reputation of supporting partner organizations to fund the scheme’s startup costs whilst ensuring the credibility and wide media publicity that are critical to establish consumer confidence and awareness, and draw visitors to the lending website. The public role includes financing a revolving insurance fund to cover the risk to consumers who lend to SMEs that might default on implementing the business according to Franchise guidelines, which could lead to loss of carbon credits and thus compromise loan repayment.

What barriers does your proposed solution address?

Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs.

If you checked any of these barriers, describe how your solution addresses them

Lack of collateral and lack of financial capacity: SMEs in developing nations are often under-capitalized or lack assets to ensure the collateral necessary for obtaining (working capital) loans. The standardized franchise reduces SME business implementation risk, and this allows the Carbon Financier to guarantee future carbon revenue payment. This greatly reduces the need for SME collateral.

Lack of SME access to skills / knowledge / markets: by providing a standard franchised business model, SMEs are provided with proven systems, training, coaching, monitoring and support, and thus enabled to professionally implement carbon-credit generating businesses for which they currently lack the skills, understanding or capabilities.

The unavailability of financial products tailored to SME needs is addressed by providing working capital loans on favorable terms, since they are raised from hard currency, low-interest Western consumer markets that require relatively low interest payments and protected by a publicly funded insurance fund.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Recent years have seen a proliferation of successful online Peer-to-Peer lending schemes, such as Kiva, who have demonstrated the viability of loaning money to people or micro-enterprises in developing countries – but do not generally return money with interest. By modifying their approach to extend loans to SMEs that run climate-saving businesses; and by offering unparalleled security, reputation, social/environmental impact, as well as attractive interest rates, we offer an attractive proposition, which will catalyze carbon-saving enterprise in developing countries.
CarboCo and its partners have already developed and implemented a first SME franchised improved cookstove project in Madagascar, as well as a solar lighting business, thus providing proof-of-concept at the SME and carbon level. By focusing on CER and VER markets, we set the bar high in terms of professionalism and rigor.

How many firms do you expect to reach?

This initiative aims to reach at least 50 SMEs over the next 5 years – with multiple franchised projects running at a time as the business scales.

What is the volume of private SME finance you aim to catalyze?

Through Climate Lending we aim to raise multiples of $750,000 (with each sum representing an average full SME carbon business). Our projections forecast raising $40-50m in loan capital during the first 5 years.

What time frame will be required to reach these targets?

Our business plan focuses at the next 5 years.

Does your solution seek to have an impact on public policy?

No

What would prevent your solution from being a success?

* Failure to have a carbon project registered by UN Executive Board. This would affect one, but not all Franchise activities.
* Inability to generate sufficient lender trust despite ‘big name’ underwriters and the publicly funded insurance fund.
* Inability to grow to scale rapidly, for instance by failing to generate sufficient media awareness and ‘hype’ to attract online lenders in sufficient volume.
* Inability to partner with big name organizations, thus reducing ‘clout’ and consumer confidence.
* Carbon market risk, such as a dramatic reduction in the price of CER/VER credits – although this is mitigated by emissions reduction purchase agreements that include a locked-in minimum price.
* Bankruptcy by SMEs that have accepted and spent a loan. This is mitigated through the Franchise Agreement, in which ownership of goods purchased with the loan remains with CarboCo until outstanding loans and fees have been fully reimbursed. This allows CarboCo to take over the activities of a carbon project if the implementing business fails.
* Poor quality business implementation by SMEs that have accepted and spent a loan. An example is lack of monitoring and reporting, which could threaten the issuing of carbon credits. This is mitigated by: 1) careful SME monitoring by CarboCo; 2) financial incentives whereby SMEs are paid carbon revenues last, after outstanding loans & fees have been repaid.
* A severe price drop in the CER/VER carbon markets, resulting in financial non-viability of the SME businesses. This is mitigated through purchase agreements with our Carbon broker, and which includes a minimum price guarantee.

Sustainability
List all the funding sources that are required for the sustainability of this solution

1) Startup funding is required to finalise developing the Franchise, the Climate Lending website, as well as marketing expense for website promotion and acquisition of participating SMEs, estimated at $500,000 in the form of a grant or soft-loan.
2) An independently managed loan insurance fund will be set up, its size anticipated at 5% of outstanding loan volume. Based on first-year's projections, an initial amount of $750,000 is required. The insurance fund will subsequently self-finance through the contribution of a percentage of carbon revenues realized.
3) Loans to SMEs are raised from individuals or organizations through the website, with a maximum of $750,000 per SME franchise, and an expected total of 50 franchises after 5 years, thus generating an expected $40-50 million towards SME finance over this period.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

Public finance is needed only once: on startup to finance website & franchise development costs; and for the creation of the initial loan insurance fund. Once set up, this then catalyzes the raising of additional funds through the peer-to-SME lending website from private individuals and organizations that wish to lend to carbon-saving businesses.
The SMEs pay back their loans once carbon credits have been generated, issued and monetized. Depending on which type or mix of carbon-saving franchise activities are implemented, which determines how long it takes before carbon revenues become available, the time frame to financial independence is between 2 and 4 years.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

Without an initial one-time investment, this business cannot be started – however the absence of such financing in subsequent years is foreseen as costs are covered by earned revenues. For instance, ongoing Master Franchise business expansion, website maintenance, fees & overhead costs as well as margins are financed from franchise fees paid by the SME franchisees, and through a commission applied to carbon revenues.

A reduction in loan volumes generated through the website is managed by carefully limiting the loans subsequently extended to SMEs.

This business is not viable if the price of CER/VER carbon falls below $10 per ton of CO2.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Establishing strong partnerships with large, highly reputable and well known organizations is critical to success of this venture. Only through highly visible and credible partnerships will this initiative become newsworthy to global news media. This is key to driving large numbers of visitors to the Climate Lending website, without which it will be very difficult to attain serious loan volumes. Equally important, partnerships with such organizations will instill trust that the scheme is credible – thus providing essential confidence to lenders that their money is secure and will be returned with interest.

Ashoka and the Rockefeller Foundation are ideal partners in this regards – and combined the participation of the G-20, strong global media exposure is virtually guaranteed if this proposal wins. Meanwhile, the development banks and interested bilateral donors that support this challenge, might be interested in financing startup costs or creating the loan insurance fund, or even subsequently invest by making first loans through the website.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

Doing business in developing countries entails political, economic and climatic risk, which differs per type of franchise activity (e.g. a biomass plantation might be susceptible to adverse weather conditions, whilst a fuel-efficient cookstove business is more vulnerable for political-economic insecurity). Such risk is mitigated by diversifying by business type as well as by country.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

This business intends to scale rapidly, by aggressively growing loan volumes raised for SMEs through the website. Keeping step with the funds thus generated, geographical replication will take place by competitively identifying SMEs in key African and Asian territories. Country selection takes place based on several criteria, including the potential and feasibility of selected carbon-generating business project, bureaucratic and fiscal considerations, etc. Initially, the business will offer only two carbon franchises: fuel efficient cookstoves and solar lighting. Based on milestones that include minimum loan volume and numbers of participating SME, country coverage and organisational management capacity, additional offerings will become available (to include for instance biomass plantations for the production of charcoal or electricity co-generation).
An important consideration for scaling up is building partnerships with financial institutions that bring in key expertise for handling growing loan volumes and managing SME investments.