Challenging the traditional approach of micro-finance
There are now more innovative financing approaches to bring about the best results for beneficiaries around the world. The ever-evolving business climate today requires microfinance institutions (MFI), non-governmental organizations (NGO), other service providers, and financial institutions (FI) to meet the demands of the market and consumers.
S3IDF’s model is resilient and adaptable to most cultural environments and market conditions. The Social Merchant Bank Approach (SMBA) is a pioneering method to help underserved communities gain access to adequate infrastructure and other basic services. The SMBA includes three bundled services: leveraged co-financing, technology access and knowledge, and business development support.
Our method is different from traditional micro-finance through the types of activities funded, the scale of funding provided, the options that are provided, the engagement between those who borrow and the borrower(s), and the overall impact it can have on the poor.
S3IDF specializes in facilitating funding that gives poor beneficiaries better access to infrastructure and other basic services. As explained in Annex A of this report published under USAID’s South Asia Regional Initiative/Energy (SARI/E), microfinance loans are often significantly smaller than those offered under the SMBA. Moreover, the small loans provided through micro-finance institutions tend to be too low for borrowers to access the type of equipment that can increase income generation and build wealth through asset ownership (for example, a small hydropower system to provide electricity and a grain-grinder that then uses the electricity to create higher value products). Not only are microfinance loans smaller than what is provided under the SMBA, S3IDF leverages and works to achieve local co-financing. Additionally, the SMBA helps offer and make possible a range of financing options for beneficiaries, such as short- and long-term loans, equity, loan guarantees, and other credit conditioning.
Poor aspiring entrepreneurs do not have a credit history, collateral, or the documented track record of having run a business before. This frightens banks and other financial institutions, because it seems to be extremely risky to offer loan options to people that seemingly do not have the resources to account for their losses if they incur any. How does S3IDF override this problem? S3IDF uses its own development and philanthropic capital as partial risk guarantees to convince FIs to provide loans to otherwise non-qualified poor beneficiaries. If the bank accepts, they will offer loans to beneficiaries, using the development capital that we provided as collateral (through fixed deposits in the bank) on behalf of the beneficiaries. This bargaining chip mobilizes private and/or commercial capital to serve poor beneficiaries. Bank officials, S3IDF staff, or trusted intermediaries and partners aid in the collection of loan repayments. At the end of a successful loan period, S3IDF receives its initial capital back plus bank interest that accrued during the loan guarantee period on the fixed deposit and we restart the process for loans for new entrepreneurs.
The SMBA is revolutionary because opens up access to types of capital (specifically private and/or commercial) that have traditionally not be used to further pro-poor projects and investments. Every dollar S3IDF invests typically yields at least two to four dollars in capital injected by local entrepreneurs and FIs to fund enterprises, creating a multiplier effect for positive economic growth in India. We hope to spread the SMBA in the coming years as an alternative to traditional microfinance and indicate its success.