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
Root Capital provides capital and financial training to SMEs operating in poor, environmentally vulnerable places. By doing so, we enable SMEs to expand their operations, generating higher and more stable household incomes for small-scale producers and supporting sustainable rural communities. Over time, we aim to demonstrate the financial viability of rural SMEs and catalyze dynamic capital markets to serve them at scale.
Since our inception in 1999, we have disbursed 805 loans totaling $213M to 292 SMEs, with a cumulative repayment rate of 99.7%. Between 2007 and 2009, our disbursements in dollar terms grew at an annual rate of 44%, and our growth through Q2 2010 has maintained this pace. These 292 SMEs provide market access, employment opportunities, and enhanced incomes and quality of life to over 400,000 smallholder producers.
Root Capital’s loans enable our borrowers to maximize revenues (thanks in large part to access to international premium market prices) and improve the livelihoods of their farmer and artisan suppliers. In the first half of 2010, our 124 borrower enterprises generated $235 million in revenue. They purchased $170 million in coffee, cocoa, sesame, honey, spices, shea butter, handcrafts, fruits, and nuts from more than 120,000 rural producers, contributing an average of approximately $1,400 in annual income to farmer and artisan households. In addition to economic benefits, our borrowers improved their surrounding landscapes by supporting 215,000 hectares of sustainably cultivated crops.
While tracking our key metrics is important, we are currently developing a new impact assessment framework that embraces the multi-dimensionality of Root Capital’s impact and the unique impacts of our borrowers on their farmer suppliers. For example, one loan might have exceptional impact because it enables a small cooperative to grow, while another loan supports an enterprise with very effective social programs, while yet another supports a cooperative that provides non-drug-related employment opportunities in a region that has historically produced coca. This framework will help us to identify each type of impact, track how often it occurs in our portfolio for both reporting and strategic purposes, and draw lessons that enable us to improve our services and loan evaluation processes to maximize our impact on rural businesses and smallholder producers.
How many firms do you expect to reach?
By 2013, we expect to finance over 365 SMEs annually (650–700 unique SMEs over time), representing a compound annual growth rate of 19% from our 2010 target of 224 SMEs.
What is the volume of private SME finance you aim to catalyze?
In 2013, we expect to disburse over $140M, representing a compound annual growth rate of 25% from our 2010 target of $74M. This accounts for our direct lending only and does not include the additional external financing that we plan to catalyze through other financial institutions.
What time frame will be required to reach these targets?
Because demand for financing from bankable rural SMEs far exceeds supply, we project continuing to grow our disbursements at an aggressive rate of 25% annually for the foreseeable future. We anticipate that our lending model will achieve sustainability (e.g., interest income and fees more than cover the fully loaded operating expense of our lending activities) beginning in 2013.
What would prevent your solution from being a success?
The greatest risk that threatens the success of our solution is if commercial financial institutions, both in developing and developed countries, do not follow our lead in providing capital to rural SMEs. On the supply-side, many traditional and community-based financial institutions perceive our work as higher risk. In addition to this perception, the opportunity cost in applying our model is a challenge given that they could seek higher returns in different markets. Furthermore, banking laws and regulations in some countries may actually prevent financial institutions from lending without fixed assets as collateral.
Through our finance, financial education, and field-building programs, we are working to mitigate these risks to provide the clearest possible demonstration effect to commercial financial institutions, and to leverage this demonstration effect through targeted outreach, advisory, and training to commercial and community-based financial institutions and small and growing businesses. As we continue to build out our approach in the coming years and as we reach sustainability with our lending model, we believe that we will further demonstrate the viability of our work and supporting SMEs and a path towards sustainable development.