Village Wealth Creation Fund to support village enterprise development

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Village Wealth Creation Fund to support village enterprise development

Namibia
Project Summary
Elevator Pitch

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

The poor in African villages have physical assets, which are often owned informally (no property rights), and thus cannot be used as collateral to generate income. The solution is to converts unproductive assets (land, water and cattle) owned by people in villages into financial assets through creation of village SMEs.

About Project

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

The aim of the solution is to strengthen the village economies and stimulate production in rural areas, by empowering rural population to actively engage in the production process and using their resource endowment. Various research papers indicates that among the wealth that is held by villagers in many African countries tend to be less diversified and concentrated more in physical and non-tradable assets such as land and cattle and very little off their wealth held in the form of financial assets. The poor in African villages have assets, which are often owned informally (no property rights), and thus cannot be used as collateral to generate capital. The solution is unique because it will lead to the following: Conversion of physical/unproductive assets into financial assets: Idle physical assets such as land, labour, water and other unproductive resources in villages will be put to good use and generate profits and converted into liquid/financial assets. These new financial assets can be used to put in motion more production in rural areas and villages. Share Ownership: Individuals and families in villages will have the opportunity to own shares in companies (village SMEs) that will be set up to undertake production at village level. Village SMEs will be owned by villagesl. Access to finance: Village SMEs with new balance sheet will access finance through banks, pension funds and other lenders, something individual villages could not do despite possessing the physical assets. Integrate village economies into modern economy and transformation of villages into production and business centres.
Impact: How does it Work

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

Ever since the independence of the targeted countries, socio-economic assessments of these countries have pointed out these countries high levels of poverty and inequality despite substantial amount of public funds injected to address poverty and income inequality. Governments of the targeted countries have for the past fifteen allocated the biggest part of their national budgets to education, health and other social spending allocations in an effort to address poverty but the unemployment and poverty situation continue to worsen. The Village Wealth Creation Fund will address this weakness by ensuring that the rural poor take ownership of their own destiny through running of their own businesses. Poverty and Income Inequality Reach: Poverty depends on average income level and extent of inequality. Hence, SME growth in rural areas will affect poverty and reduce income inequality through its impact on the level of rural income. By virtue of share ownership and job creation, the rural population income level will rise substantially and this will help close the income gap between the poor and the rich , urban and rural. The emergence of new business segments in rural areas and the resulting rise in GDP will translate in more tax revenue for governments. The rise in government will enable government to increase social spending on health, education, housing, social welfare and more business support to close the inequality gap. Gender Participation: Participation of women will be critical ingredient for the success of the project success and sustainability. Women are majority in rural areas and it is estimated that with increased financing to rural business entrepreneurs, many women operating on informal basis will be converted into formal SMEs and grow their business. Income levels for women is therefore expected to increase substantially.
About You
Organization:
First Capital Namibia
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About You
First Name

Martin

Last Name

Mwinga

Your Organization

First Capital Namibia

Country

, KH

About Your Organization
Organization Name

First Capital Namibia

Organization Phone

264 61 401326

Organization Address

Box 4461, Windhoek

Organization Country

, KH

Organization Type

Private Institution

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Your solution
Country your work focuses on

, CA

If multiple countries, please list them here. If your solution targets an entire region, please select it below

Zambia (Western Province), Botswana (North and Western parts)

Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

$1-5 Million

Number of employees in your target firms

Average number of employees of your target firm

More than 150

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

The size of investment in each village SME will depend the nature and type of business undertaken and will range between $25 000 for SMEs that will be producing on small without value addition and to $500 000 for SME that will be undertaking full product value chain, with an average investment size of $100 000. The investment will cover the cost of setting up the new legal SME entity owned by identified village, organizing villagers into production and marketing centers, cost of due diligence, training, cost of transferring ownership of land and other physical asset to the new SME.

What stage is your solution in?

Idea phase

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

As long as initial wealth gaps exist and if villages and urban experience sharply different returns in asset markets, there will be gaps between rural and urban areas that cannot be narrowed simply by ensuring that rural areas have access to education. Most governments in Africa have accepted that the private sector is the engine of economic growth; it needs to have access to finance, technical and management support. The Village Wealth Creation Fund will provide solution in the sense that small and scattered villages will be organised into business units through the formation of SMEs e.g. five villages with a population of say 10 people in each village will be the shareholder into the new village SME. The villagers will transfer part of the idle/unproductive land, access to water into the new SME. The new SME which will be legally registered will then use the available resources within the community to produce products such crops, poultry, butter, eggs, bread, cattle etc and sell these to urban canters and other markets. The shareholders (villagers) will supply labour at reasonable price, and all profits declared as dividends will be paid to the villagers. In addition to creating jobs, people in the village will for the first time become shareholders, and their idle/dead capital will be converted into financial assets the new SMEs, who in turn can use these financial assets to access funding from private financial institutions.
The Village Wealth Creation Fund will act as catalyst for private SME finance and leverage public intervention through:
• The Village Wealth Creation Fund will become the investment vehicle through which investors who want to fund business entrepreneurs and get exposure to the rural economy can invest. In addition governments can channel some of their funds intended for rural development into this fund inorder to ensure those funds are well invested.
• taking equity stake in the new village SMEs by providing village entrepreneurs with a much needed source of funding their business and converting their physical assets into financial assets which in turn will be used to access funding from the market;
• Rural village population will become shareholders and begin to understand how a business functions and is operated. This funding will enable idle labour to become active and participate actively in the production process.
• Unemployed youth, women will become actively engaged in management of these new enterprises, and with support from government these entities will grow and expand much faster and generate more wealth for the rural communities;
• With the decline in unemployment and idleness in villages crime will decline as people’s mind will be more focussed on making money and generating more wealth;

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity).

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

Information Asymmetry& Informality: lending institutions in Africa’s rural areas do not have enough information about business opportunities in rural areas, and entrepreneurs in villages have no information on the availability required capital. The Village Wealth Creation Fund will be proactive and help identify villages with comparative advantage in a particular product/business and help identify good entrepreneurs to undertake such projects.
Lack of collateral: Rural population have assets such as land, cattle, houses, forests and other resources, but they do not have property right or title deeds on these resources and therefore they cannot use these assets as collateral. The aim is transfer these physical assets into the ownership of new legal SME entities who through their business activities will process these physical assets into financial assets. By converting physical, illiquid assets into financial assets that can be used as collateral village entrepreneurs will have access to finance from existing lending insititutions. The Village Wealth Creation Fund will provide equity/mezzanine financing and will not require collateral to advance funds to the new village based SMEs. To ensure that the funds are utilised for intended purposes, the Village Wealth Creation Fund will have representatives on the management level of the business, help with management of the enterprise..
Lack of SME skills/ knowledge markets: First Capital will assist SMEs to develop a business plan and will help train the village entrepreneurs in business and financial management. Unavailability of financial products tailored to needs: SMEs in rural areas needs long-term funding that puts less pressure on their cash-flow position combined with intensive management and mentoring programme. Both equity and lease financing will meet the funding needs of SMEs in rural areas who take time sell their products.
High transaction costs for financial intermediaries to serve SMEs
Rural SMEs that receives loans from banks are always charged higher fees due to perceived risks. First Capital will use unemployed graduates in business and accounting under the guidance of an experience consultant to assist with due diligences and valuation projects viabilities on a small fee.
Underdeveloped local capital markets (term local currency funding, exit options for SME equity)
Most of the targeted countries capital markets are underdeveloped. All the targeted countries have well established pension funds and insurance companies, and they have surplus savings that could be channelled to the development and funding of SMEs. Once all village SMEs are established with growing balance sheets, First Capital will facilitate the issuance of a SME long-term bond to raise funds from pension funds, insurance companies and other investor. In addition, the Village Wealth Creation Fund will have built a track record in terms of returns and will raise more funding from investors by issuing more shares.

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

The livelihood of the population in rural areas is mainly based on agriculture, typically subsistence farming. Poverty in these countries is widespread and deep-rooted and constitutes the priority development challenge in each targeted country. Currently it is estimated that about 70% of the population is under the national poverty line, unemployment rates is estimated at more than 40%, with income inequality of more than 60% or 0.60 in these countries. The rural sector in Africa is made up of small villages with a population of approximately between 10 – 20 people per village. With such scattered population, with very little income there are no incentives for big foreign investors to set up factories in rural areas of Africa. It is against this background that the innovation solution proposes a village development strategy based on each village specializing in the production or manufacturing of one or two products in a coordinated fashion. Through this process it is expected that new business enterprises (SMEs) owned by people residing in villages will be created.
The proposed solution will have the following effects that will allow citizens in rural areas to generate capital.
• Fixing the economic potential of assets: The solution will ensure that dead capital in the form of unproductive physical assets without title deeds with now be transferred to a new legal entity (SME) who will have title of those assets and use them to generate wealth and build financial assets for communities. Legal property rights will give the rural population in villages the tools to produce surplus value over and above its physical assets.
• Integrating dispersed information into one system: Rural areas and villages in many African countries have not created unified formal property systems, similar to the ones in developed countries. Our solution intends pulling together the scattered facts and rules that had governed property/assets throughout the villages, and integrate them into one system. This "pulling together" of property representations in villages will deposit all the information and rules governing the accumulated wealth of villager/rural population into one knowledge base.
• Making assets fungible: One of the most important things a formal property system does is transform assets from a less accessible condition to a more accessible condition, so that they can do additional work. Unlike physical assets, representations of assets are easily combined, divided, mobilized, and used to stimulate business deals.
• Networking people: By making assets fungible, by attaching owners to assets, and legal ownership and by making information on the history of assets and owners easily accessible, formal property systems will convert the citizens in rural villages into a network of individually identifiable and accountable business agents.

How many firms do you expect to reach?

The Village Wealth Creation Fund targets to organise small villages into business units (SMEs), and given the many villages in the targeted countries it is expected that the solution will create between 50 and 100 SMEs, on average 25 SMEs in each targeted country owned by rural people.

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

To organise small villages into business units and create 100 SMEs in all targeted countries an amount of US$25 million is initially required. It is expected that most of these SMEs will start generating enough cash flow to finance their future operations without the need for further public funding.

What time frame will be required to reach these targets?

First Capital (the Fund Manager) will disburse all funds within a period of 1 to 2 years, and will realize all investments made within a period of 3 to 5 years. Year one will involve conducting due diligence research on the potential of the targeted countries, try to identify existing SMEs and entrepreneurs in villages, establish resource endowment and each village’s comparative advantage, and review of all regulatory/laws governing property rights in rural areas. This will be followed by structuring suitable business structures that will involve in running business in rural areas.

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

Yes

What would prevent your solution from being a success?

The success of the innovative solution depends on main factor. The main factor that might prevent the innovative solution from succeeding is village reluctance to transfer part ownership of the land to the new SMEs, and whether they can work as a team. There might be old laws that need to be reviewed and amended to allow the transfer of communal or rural land and resources to new business entities. In addition, most of the villages resort under a traditional chief who is the custodian of the land and it might take time to reach agreement of formalising these relationships.
One important reason why the property system works like a network in developed countries is that all the property records (titles, deeds, securities, and contracts that describe the economically significant aspects of assets) are continually tracked and protected as they travel through time and space. This is not the case in many rural areas in Africa, and this means that more time is needed to identify and verify ownership of these properties in villages. Files/records need to be established and formalised before these properties in rural areas can be transferred to a legal entity. So the first step will be to bring everybody into a record-keeping system, and attach value to these assets in order to determine the value of each community’s wealth.

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

The solution will initially require both short and long-term funding and other tailor made funding structure products that meet the asset/liability structure of the new entity. A combination donor funding and private market funding will make the proposed more viable and sustaining. Funding sources will be targeted from the following entities:
• international aid organisation and governments (seed capital and technical support to kick start the solution);
o Governments of targeted countries (seed capital and technical support);
o local Development Banks ( to co-finance business projects undertaken by SMEs)
o Local financial institutions such as pension funds, insurance companies (as equity and debt investor into the fund);
o Donor Funding (in form of grants to reduce the funding cost of SMEs); and
o the private sector with surplus funds looking investment opportunities.

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

The ultimate objective of donor intervention in our business model is to improve small enterprise or SME performance in rural areas, as a means to achieve higher economic growth, generate employment, reduce poverty, and meet social objectives. Improving SMEs performance requires many ingredients, such as a policy environment conducive to enterprise competitiveness, access to financial and non-financial serv ices, and expanding markets for SME products and services, creation of well-functioning market with a diverse array of high-quality services that meet the needs of a large proportion of SMEs affordably, and once this is done SMEs in our model will function without donor support. The Village Wealth Creation Fund does not intend to be donor depended because it will be based on business principles. The initial seed capital that will be invested in the fund, will not be given as grants to SMEs, but will be used by the Fund to buy equity stake in the new SME and the required capital the SME needs to start operating. The SME will be owned by both the Fund and the participating villages, with each participating village contributing either a piece of land, forestry, cattle or any acceptable physical assets as a form of payment for its shares in the new SME. Unlike other business model, our solution ensure that the new SME will have resources to start with e.g. SME that will be involved in the production and processing of maize for maize meal, will automatically acquire land on which to produce maize transferred by the participating villages. The funds invested by the Village Wealth Creation Fund will the be invested to produce maize, buy machinery and equipments to produce maize.
In order to ensure sustainability each new SME will be required to produce a business plan. This business plan ideally should meet certain minimum criteria and demonstrates sustainability of the project concept, as well as its development impact or outputs. The following is an illustrative list of business plan elements:
• Marketing and sales plan – an explanation of how the market potential will be realized, size of the market and demand for products;
• Competition – an assessment of how the market and sales assumptions could be affected by other similar competitors entering the market;
• Financial bottom line analysis - this must show the profitability calculations, justified and projected into the future to show how the situation will improve.
• Funding requirements – a summary of funding requirements and of financial contributions;
• Operational plan – an organizational chart with clear responsibilities, staffing plan, equipment and facility plans and assessment of possible problems and solutions.
The time frame through which sustainability will be achieved is 3 to 5 years.

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

Our innovative solution puts a business enterprise at the centre of community wealth creation and is built on the idea that when rural and village resource endowment is applied and used creatively, it is the most efficient social change agent and the most sustainable way to build business rural areas. We combine sound business practices with innovative social solutions to create long-term, self sustaining economies in rural communities in the targeted countries. The Village Wealth Creation Fund will provide solution in the sense that small and scattered villages will be organised into business units through the formation of SMEs e.g. five villages with a population of say 10 people in each village will be the shareholder into the new village SME. The villagers will transfer part of the idle/unproductive land, access to water into the new SME. The new SME which will be legally registered will then use the available resources within the community to produce products such crops, poultry, butter, eggs, bread, cattle etc and sell these to urban canters and other markets. The shareholders (villagers) will supply labour at reasonable price, and all profits declared as dividends will be paid to the villagers. In addition to creating jobs, people in the village will for the first time become shareholders, and their idle/dead capital will be converted into financial assets the new SMEs, who in turn can use these financial assets to access funding from private financial institutions.

The SMEs that will be created will sell their products to the urban centres and in markets of targeted countries. Efforts will be made to secure long-term contracts with government so that SMEs will sell their products to government institutions e.g. an SME in rural areas involved in the production of school uniforms will reach an agreement with government that all schools falling within a certain l be supplied uniforms by the rural SME. It is expected that all new SME established should be able to break-even within year two of their operation and become self-reliant without relying on donor funding for along time.

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

Most villages in the targeted countries falls under customary law, under the control of the tribe's chief. For the innovation to succeed the chief and their traditional authority need to buy into the concept. Once the chief buys in, he will be instrumental in convincing his communities to part with their land for development purposes. The other partnership that is crucial for the success of this innovation partnership with local and central government of each target country.

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

Our innovation is to create organised structures and convince the rural population to start formalising their business transaction through organised legal business structures. Several previous studies found that demographic characteristics, such age and gender, and individual background, such as education and former work experience, had an impact on entrepreneurial intention and endeavour (e.g. Kolvereid, 1996; Mazzarol et al., 1999). A research by Charney and Libecap (2000) found that entrepreneurship education produces self-sufficient enterprising individuals. Also, the study revealed that entrepreneurship education of employee increases the sales growth rates of emerging firms and graduates’ assets. Mazzarol et al. (1999) found that female were generally less likely to be founders of new business than male. Finding from another study in India by Sinha (1996) disclosed that successful entrepreneur were relatively younger in age. In their study on Internet café entrepreneurs in Indonesia, Kristiansen, Furuholt, & Wahid (2003) found a significant correlation between age of the entrepreneur and business success. Kolvereid (1996) found that individuals with prior entrepreneurial experience had significantly higher entrepreneurial intentions than those without such experience. Conversely, Mazzarol, et al. (1999) found that respondents with previous government employment experience were less likely to be successful founders of small-businesses. But, they did not investigate the relationship between previous employment experience in private companies and entrepreneurial intentions. The above observation shows that it might be a challenge for entrepreneurs to emerge from villages and rural areas due to the level of education, and the composition of the rural population (female vs male, young Vs old etc). It is therefore clear that education, work experience and gender, access to technology and information, will be crucial in the success of our innovation and in designing an intervention package to address short-comings.

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

Our solution will make a significant impact on the agriculture sector in the targeted countries where rural population possess thousands of fertile agriculture land not put to good use. The vast majority of the poor in the targeted countries reside in rural areas, where the incidence and intensity of poverty is also higher than urban centers. Life in rural setting, from the economic point of view, is backward. Villages and settlement in rural areas is typically scattered without any form of structure. However, the rural poor in villages commonly possess multiple physical assets and sources of income from agriculture and other natural resources. A significant share of economic activity in rural areas is devoted to the production of basic commodities, especially staple foods, for which the income elasticity of demand is low.

Agriculture constitutes the principal source of income and employment for the majority of the population of the targeted countries. Greater proportion of the foreign exchange these countries earns also comes from this sector. The sector accounted for about 8% of GDP in Namibia and Botswana and more than 20% in Zambia. Contribution of agriculture sector has the potential to increase and serve as an engine of growth in other sectors.
Analysis of national account data in the targeted countries has clearly indicated that there is a close relationship between the overall performance of the economy and the performance of the agricultural sector. A simple regression analysis was made to quantify the linkage between agricultural and GDP growth rates in terms of elasticities. According to the estimation result, a 1 percent growth in agriculture would lead to a 0.32 percent growth in GDP. The fact that other sectoral elasticities of growth with respect to GDP are lower than this indicates that agriculture is the predominant sector in determining income at the national level in these countries. The study found that growth in agricultural value added is, therefore, the most determining factor of real GDP percapita growth in a number of African countries, including the targeted countries.

Contribution to Employment: Similarly, agriculture is the predominant sector that contributes to employment in the targeted countries, although its contribution to employment has been declining over the years to declining investment in the sector. Poverty in the targeted countries is widespread and deep-rooted and constitutes the priority development challenge in these countries, and the increased established SMEs in rural areas that supports agricultural development will lay a strong foundation in building wealth for the nations of these countries.

In addition to direct impact on agriculture sector, our solution will have impact on tourism, manufacturing (butter making, milling, abattoirs, bakeries, etc) and service sector such as banking, microfinance, insurance, medical funds and fund management.