Kiva Labs - Growing Social Enterprises

The challenge

Developing countries often have a large number of micro-enterprises, like shop owners, and large firms, but far fewer small and medium enterprises (SMEs)--businesses with 5 to 250 employees. In high-income countries, SMEs are responsible for over 50% of GDP and over 60% of employment, but in low-income countries they generate less than half of that - 17% of GDP and 30% of employment. The resulting gap in the development of SMEs in poor countries relative to rich countries is often called the 'missing middle'.  It exists because financing businesses that fall within this category can be expensive. Microfinance institutions are not equipped with the capacity to serve these enterprises, while banks, impact investors, and even governments or multilateral agencies focus on larger loans because due diligence costs are prohibitively high.

Problem #1: Shortage of affordable working capital

Social enterprises are creating new business models to meet the unique needs of customers at the bottom of the economic pyramid; however, making the leap from philanthropic seed funding to the commercial investment necessary to scale-up proven concepts requires working capital that few funders are willing to provide.  If available at all, working capital financing options tend to be very costly. For example, trade finance instruments such as merchant cash advances typically have interest rates above 25% APR and require collateral. Few social enterprises qualify for such instruments.

Proposed solution

Providing affordable working capital to conduct vital business operations, whether it’s purchasing inputs or raw materials, acquiring productive assets, or conducting demand-generating activities. Work through accelerators and directly to social enterprises where possible.

Social enterprises need more capital to access machinery and other assets to grow their businesses.

One partner’s innovative approach

Agora Partnerships, a Latin American social enterprise accelerator, graduates many social enterprises that have the know-how but not the working capital to run their businesses. For example, PowerMundo, a graduate of Agora Partnerships’ accelerator program, received a $30,000 loan from 943 Kiva lenders to purchase inventory for its rural solar distributor business in Peru at 0%.

A direct lending approach

Prime Cookstoves, a clean cookstove manufacturer and distributor based in Indonesia, needed financing to bolster their just-in-time inventory in order to scale distribution. However, they did not have access to a Kiva Field Partner and their only alternatives were expensive trade finance products. Through Kiva’s new Direct-to-Social Enterprise (DSE) program, Prime Cookstoves was able to raise a direct $32,000 loan from 1097 Kiva lenders in just 5 days.

Problem #2: Lack of investment-ready enterprises

Impact investment funds, philanthropic foundations, and development finance institutions often lament the lack of social enterprises that have the capacity to absorb the type and amount of capital that they disburse. This issue stems from the fact that such organizations only consider larger loans to reduce the relative cost of due diligence.

Proposed solution

Provide growth capital to social enterprises to strengthen and scale their operations, so they can graduate to a stage where they can attract larger investments.

One innovative approach

African Entrepreneur Collective works with entrepreneurs, like rice processor Jean Bosco, who need help taking their businesses to the next level to attract larger investments. Jean Bosco received a total of $190,000 across 5 loans from AEC, creating a proven track record that attracted philanthropic foundation investment and interest from an impact investment fund.

Problem #3: Prohibitively high cost of due diligence

To establish the creditworthiness of potential borrowers, investors and lenders conduct due diligence. For most investors due diligence is a fairly fixed cost, meaning a similar level of due diligence is conducted for an investment of $50,000 as for an investment of $500,000. As a result, investors and lenders tend to prioritize larger investments at the exclusion of smaller firms.

Proposed solution

Interest in impact investing and social entrepreneurship is growing rapidly and many qualifed analysts are seeking opportunities to gain first-hand experience in impact investing. Kiva has developed a crowdsourced due diligence platform that offers business managment students and working professionals the opportunity to conduct due diligence on Kiva's pipeline of social enterprises for underwriting purposes. The program provides individuals with the impact investing experience they seek while lowering due diligence costs, thereby enabling Kiva to reach more small and growing businesess.

One innovation approach

Our pilot with +Acumen saw several hundred ‘crowdvetters’ come together from all around the world to conduct due diligence on a $50,000 loan to a solar distributor in Zambia. The vetters were volunteer graduate students and other professionals interested in impact investing and social entrepreneurship.

What is success?

Our major barometer for success is the growth of innovative social enterprise business models throughout the world.

  • Scaled social impact: multiplying and sustaining the social impact inherent in their business models.
  • Financial graduation: leveraging Kiva capital to eventually access larger amounts of capital from either formal banking services, impact investors or development finance institutions.
  • High repayment rates: unlocking new revenue streams to ensure sufficient cash flow to repay these low-cost loans.
  • Growth of social enterprise sector: sharing best practices and inspiring new business models to catalyze the creation of additional social enterprises throughout the world.