Root Link

Root Link

Cambridge, United StatesQuetzaltenango, Guatemala
Organization type: 
nonprofit/ngo/citizen sector
Project Stage:
Growth
Budget: 
$250,000 - $500,000
Project Summary
Elevator Pitch

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

Root Capital grows rural prosperity by investing in small and growing agricultural businesses that build sustainable livelihoods in Africa and Latin America.

About Project

Problem: What problem is this project trying to address?

This initiative addresses the inability of rural cooperatives in Guatemala to access quality financial services tailored to their industry specific needs. Financial institutions (FI) are hesitant to invest in these cooperatives because they often lack expertise and the necessary systems to create financial statements, financial policies, and interrelated plans of production, collection, sales. Without these skills, rural businesses struggle to manage their operations efficiently, are unable to build reliable track records with buyers, and are thus deemed high credit risks by FIs. This stifles cooperatives’ potential to offer services to support their producer members, integrate rural producers into global supply chains, increase rural employment, and improve natural resource management.

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

Launched in October 2011, Root Link is a three-year initiative designed by Root Capital to test an integrated "credit + training" model. As a social lender, Root Capital believes that training and capacity building are critical components to support the economic growth of rural cooperatives and their members. To this end, the project aims to promote better rural business processes through targeted capacity development, while at the same time supporting cross-sector partnerships and addressing the scarcity of rural financing in Guatemala. The project is comprised of three components: 1) train rural agricultural cooperatives in Guatemala in the management of Internal Credit Systems (ICS), essentially a microloan fund housed within and administered by a cooperative; 2) facilitate access to credit for rural cooperatives in Guatemala through targeted pre-loan technical assistance; and 3) disseminate lessons learned through rural finance networks and industry partnerships.
Impact: How does it Work

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

A well managed ICS enables a cooperative to offer an alternative source of funding to its rural member producers who have historically been forced to use their future harvest to collateralize the loans they take from local money lenders and traders. Rural cooperatives in Guatemala are now beginning to offer credit services to their members as a means to secure their supply chain. Our solutions leverages this preexisting relationship between farmers and cooperatives to improve the quality of services reaching the end user-the farmer. By training cooperatives in the management of an ICS, Root Capital ensures that individuals at the farmer level have access to sources of financing that are well suited for their needs, particularly taking into account annual cycles associated with the harvest season. Moreover, the ICS provides a revenue stream for the cooperative, facilitating growth for the cooperative, as well as increasing member loyalty to the cooperative. This project involves activities aimed at training cooperatives and equipping them with the knowledge, skills, and systems they need to offer credit to their members in a responsible and sustainable way. Activities include: an initial business diagnostic to understand cooperative operations, including portfolio management of their internal credit fund; customized work-plans targeting weak processes identified through the diagnostic, delivery of 20 days of onsite technical training; co-development of loan products, targeting rural producers; and a final diagnostic and impact assessment of the initiative.
Sustainability

Marketplace: Who else is addressing the problem outlined here? How does the proposed project differ from these approaches?

Root Capital aims to catalyze a thriving financial market that serves rural small and growing businesses that generate long-term social, economic, and environmental sustainability. If the full market demand is to be met, well-capitalized players, such as commercial financial institutions and value chain players, must crowd in. Root Capital maintains a competitive advantage as an industry leader in integrating the "training + credit" model, and by pushing the frontier further than other social lenders in relation to client size and maturity. This includes striving to reach clients that remain too small and remote for other social lenders. We offer superior customer services and financial products that are structured to meet the unique needs of agricultural businesses.
Team

Founding Story

While completing a fellowship in Mexico, William Foote (“Willy”), Founder & CEO of Root Capital, came into contact with a cooperative of vanilla growers in the Chimalapas jungle of Southern Mexico. He got to know the farmer members and observed that the cooperative leaders, though extremely charismatic, lacked business experience. The vanilla cooperative ultimately failed due to lack of access to capital, markets, and basic business skills, leaving Willy to wonder how one might change that outcome. Willy left Mexico to pursue an MBA at Harvard Business School; however, on his way back to the United States, he had a growing fear that if he did not act on his ideas, he would lose the sense of urgency. He chose to abandon business school and has been building Root Capital ever since.
About You
Organization:
Root Capital
About You
First Name

Julie

Last Name

Shea

About Your Organization
Organization Name

Root Capital

Organization Country

, MA, Cambridge, Middlesex County

Country where this project is creating social impact

, QZ, Quetzaltenango

How long has your organization been operating?

More than 5 years

Has the organization received awards or honors? Please tell us about them

-Named one of the top 100 NGOs by Global Journal.
-4 Star rating from Charity Navigator (2007, 2008, 2009, 2010, 2011, 2012)
-chosen as one of the best models that catalyze finance for small and medium-sized enterprises by The G-20 SME Finance Challenge in November 2010.
-Founder & CEO William Foote was awarded the Joan Bavaria Awards for Building Sustainability into the Capital Markets in May 2011.
-Recipient of Financial Times and IFC Achievement in Banking at the Bottom of the Pyramid in June 2009
-Recognized multiple times at Clinton Global Initiative annual meeting.
-Social Capitalist award (2006, 2007, 2008)
-Skoll Award for Social Entrepreneurship

For a full list of awards received by Root Capital, see our website: http://rootcapital.org/about-us/awards

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Innovation
How long have you been in operation?

Operating for less than a year

Which of the following best describes the barrier(s) your innovation addresses? Choose up to two

Access, Quality.

Social Impact
Please describe the goal of your initiative; outline what you are trying to achieve

This project combines the critical ingredients of affordable financing, targeted training, and active engagement of local financial institutions to strengthen smallholder farmer cooperatives and catalyze new investment in the rural agricultural sector of Guatemala. Impact assessment of the project will focus on 1) the total investment in socially and environmentally responsible rural cooperatives in Guatemala, and 2) the measured improvement in the financial management systems of cooperatives that receive technical assistance.

A minimum of $3 million in new financing will be mobilized through this initiative, benefiting 8 organizations of smallholder producers. An additional 5 organizations will receive direct financial management training.

Which barrier(s) to financial inclusion does your solution seek to address? (select all applicable)

The lack of affordable financial products tailored to the needs of underserved and excluded communities,, Other (Please describe below).

If you selected 'other' above, please specify which other barriers to financial inclusion you solution seeks to address:

Powerful incentives for commercial financial service providers to invest in rural agricultural businesses.

For which underserved or excluded communities will your solution create access to valuable, affordable, secure and comprehensive financial services?

Disaggregated, small-scale producers in remote areas typically lack 1) information about market movements to know when to sell their products, 2) direct access to these markets so that they can respond to advantageous conditions, 3) sufficient volumes to negotiate favorable terms, and 4) access to affordable credit. By organizing themselves into cooperatives and associations, they aggregate hundreds of other suppliers, small-scale producers of products such as coffee.

By strengthening the financial management capabilities of cooperatives and enabling them to offer loans to their members through an ICS, the project will reduce the effects of "meses flacos," or lean months, in which families receive no income from agricultural production. Confronted with hunger, farmers are often forced to take out high-interest loans from predatory lenders. Should the harvest fall short of expectations, the lender is entitled to the land or future earnings of the family.

Could your solution work in other geographies or regions? If so, where?

The Root Link project is currently being implemented in three Central American countries (Guatemala, Nicaragua, and Honduras) and was intentionally designed with the ultimate goal of replication in additional countries and regions. Efforts are already underway to launch similar initiatives in South America and Africa, and we have begun conducting preliminary market assessment studies about the potential for replication in Colombia.

Moreover, this current three-year pilot serves as a launch pad for regional expansion. In addition to the training engagements, Root Capital is also building up an on-line library called Root Net, a Moodle based, elearning platform that centralizes training materials in a user friendly, pedagogical format. This platform is used in combination with in-person training to provide a scalable solution to replicating FAS training in new regions with minimal support.

If your solution is dramatically successful, how will things be different in 10 years?

If our solution is dramatically successful, we will witness a shift in the role of rural cooperatives in Guatemala. With strengthened financial systems, including the ability to manage an ICS for their members, cooperatives will be well positioned to have an increasingly direct impact on their members' financial lives; for example, cooperatives will be able to offer loans that match the cycle of the product with which they work, thus smoothing the income for rural producers and their families.

Additionally, this added value from the cooperative will translate into a stronger sense of loyalty from members, which improves the financial stability of the cooperative because it reduces the risk of "side-selling," i.e. farmers selling their product to intermediaries.

Finally, the cooperative's improved business and organizational capabilities will reduce the perceived risk from local FIs and ultimately lead to more diverse sources of funding for the cooperative.

What will have had to have changed to make this happen?

The aforementioned shift in the role of the rural cooperative in Guatemala is contingent on the capacity of these cooperatives to absorb and sustain the improvements to organizational management and system that result from the intervention.

In order for FIs to begin investing in rural cooperatives, the demonstration effect will have been successful. Root Capital aims to attract attention to the market and impact opportunity and inspire imitation and replication. We believe that our greatest contribution will be to expand the frontier of rural finance directly and demonstrate what works. For this reason, one component of the Root Link project includes connecting cooperatives to local financial institutions. If successful, cooperatives will increasingly able to mobilize capital from commercial sources because the perceived risk factors and barriers to entry will have been reduced.

What has been the impact of your solution to date?

In 2006, Root Capital launched Financial Advisory Services (FAS) to deliver financial training to rural enterprises. Since then, FAS has successfully strengthened the financial management capacity of over 200 producer organizations (worldwide). These engagements have confirmed that rural business leaders, when equipped with sound financial management practices and processes, are better positioned to access credit, compete in the marketplace, grow their enterprises, and support improved livelihoods for farm households.

Since initiating the Root Link pilot in October 2011, our intervention has led directly to an additional $780,000 of loans disbursed to participating organizations in Guatemala.

What is your projected impact over the next five years?

At the end of the three year pilot, we expect to have achieved the following:
-Participating FIs will produce adapted lending tools and procedures to accommodate the specific needs, collateral availability, and profile of rural agricultural cooperatives.
-FIs will have a clear and detailed understanding of common financing challenges for producer groups.
-A minimum of $3 million in affordable credit will be delivered to 8 organizations of small-scale producers—representing approximately 9,000 smallholder producers.
-Eight cooperatives will have received training in ICS management and as a result will see an overall increase in size and sustainability of their ICS
-Cost saving results from gains in efficiency will be passed on to borrowing members, making credit more affordable.

What barriers might hinder the success of your project? How do you plan to overcome them?

Sustained success of this project requires that the cooperatives have a level of financial management and organizational capacity that allows them to apply and operationalize concepts learned during training workshops and on-site training. Because participating cooperatives have varying levels of capacity in these areas, Root Capital takes a decidedly long-term approach, standing behind rural SGBs through market fluctuations and phases of organizational growth and crisis.

Winning entries present a strong plan for how they will achieve and track growth. Identify your six-month milestone for growing your impact

Train cooperatives in ICS management and other financial management topics.

Identify three major tasks you will have to complete to reach your six-month milestone
Task 1

Complete two centralized workshops for 8 participating cooperatives; Financial Planning (Sept.) and Advanced Accounting (Oct.)

Task 2

Finalize the operational plan for 15 days of on-site training for each of the eight cooperatives in the project.

Task 3

Assist 8 project cooperatives in preparing loan application to apply for credit (December/January)

Now think bigger! Identify your 12-month impact milestone

Mobilize capital and share lessons learned in order to inspire replication.

Identify three major tasks you will have to complete to reach your 12-month milestone
Task 1

Disburse $2 million in loans to the 8 participating cooperatives.

Task 2

Sign collaboration agreements with two FIs for participation in the capital mobilization component.

Task 3

Conduct an impact study involving beneficiary groups in Guatemala.

Sustainability
Tell us about your partnerships

Examples include:
•Coordinating with Project CAMBIO, which is supporting the mainstreaming of biodiversity conservation through SGB development.
•Collaborating with local consulting firms offering training and technical support for cooperatives involved in the project.
•Partnering with Innovations for Poverty Action to conduct a randomized control trial evaluating the impact of microcredit products offered by agricultural cooperatives to their member farmers.
•Coordinating with Rainforest Alliance for a Farmer Finance "training of trainers" program.

Are you currently targeting other specific populations, locations, or markets for your innovation? If so, where and why?

The Root Link project is being piloted in three countries - Guatemala, Nicaragua, and Honduras. Based on results from the pilot phase, we plan to expand this initiative to the other Latin American countries in which Root Capital operates.

What type of operating environment and internal organizational factors make your innovation successful?

The success of Root Link relies on the core features and competencies of rural cooperatives in Guatemala. Cooperatives serve as a gathering point for smallholder farmers, making the disbursement of credit in small amounts through an ICS cost effective and ultimately affordable for rural borrowers. With their understanding of the needs of small producers, cooperatives can match credit disbursements with harvest cycle cash flows, collateralize loans with the purchase of future produce, and build member loyalty by providing financial services to vulnerable farmer households.

Please elaborate on any needs or offers you have mentioned above and/or suggest categories of support that aren't specified within the list