Frontier Markets Response to the Microfinance Crisis in India

Dear Readers,

Many of you have asked me whether Frontier Markets (FM) is affected by the latest backlash against Microfinance in India, particularly in AP. We are all quite disappointed with many responses and allegations again microfinance institutions (MFIs) today. However, we would like to ensure you that we are NOT directly affected nor responsible for this.

FM has been paying careful attention to the crisis and have always gauged our MFI partner’s ability to prioritize both financial AND social performance. We have not and will not work with "super commercial and aggressive" microfinance institutions that either do not have control over their field activities, or do not prioritize responsible financing by assessing their member's ability to afford/handle loans.

Many articles have compared Microfinance in India to the sub-prime mortgage crisis in America, and this is simply not true. The problem with these articles is that they make ALL microfinance institutions look bad and make it seem like microfinance will suddenly end in India which is NOT true at all.

I am still a believer of microfinance and know that it is in fact improving low-come households' lives. The government will start paying more attention to microfinance institution's activities in the field and will force many aggressive microfinance institutions to instill social performance metrics to ensure their activities on the ground are not motivated by sales and growth, but rather service and impact. This will become a positive change in microfinance in India.

I learned a lot from working at with MFIs in India these last few years. As the director of SKS’s non-profit arm, I was able to learn about these metrics, the tools to measure them, and how to balance social and financial performance.

We are taking these tools and implementing them at Frontier Markets - it is a guided principle for us. Our field staff are not just measured by sales and targets, but rather, household satisfaction and interaction. There are incentives for positive feedbacks and we will check how many times a field staff decides not to sell a stove to woman because she does not have the capacity to handle a loan – it is important for us to motivate our field staff to act responsibly and not through greed.

At the end of the day, there are way too many people who NEED loans to advance their businesses, and the government or public/private banking just do not have the capacity to meet those needs, India NEEDS microfinance institutions to cover those gaps. We just need to be more responsible in the field, and there are microfinance institutions who currently act responsibly in their areas. And Frontier Markets will partner with those MFIs and continue to practice its own principles on the ground.

Thank you,

Ajaita Shah

(Founder/CEO of Frontier Markets)

Day 1: Entrepreneurs in the BOP

The focus of Day 1's discussion was on the role of the entrepreneur in the development of business opportunities in low income communities. Although it is often said that those living in poverty need to be entrepreneurial in order to survive the grueling day-to-day realities of life, in reality many would prefer to have the stability of permanent employment. Therefore, although they may need to be entrepreneurial to survive this does not mean that they have the skills necessary to work with a company over a long period of time to launch a business.

How do companies and organizations looking to launch businesses in low-income communities identify entrepreneurs? What are the skills of a true entrepreneur? How do you engage them?

Frontier Market's Contribution:

My reasoning comes from the last 5 years of working with BOP women in India via Microfinance and my own company, Frontier Markets. I agree with both your points - it is not about whether entrepreneurs exist in the BOP but its identifying the right entrepreneur.

In response to entrepreneurs vs. salaried jobs: In India, there is a larger appeal to have service oriented jobs instead of being an entrepreneur. People prefer working on a farm, in a factory, as a construction worker, etc because its steady income vs. haphazard.

Creating Entrepreneurs in the BOP: Unilever or HUL and other companies will argue that creating an entrepreneur amongst women in villages is not only optimal but responsible (they have done so in their Shakti Model in India selling sache shampoos and numerous Unilever products in rural India) - this is simply not true. There is a huge opportunity cost and risk - if women cannot find people to sell products to, they LOSE their hard earned investment capital, it is a HUGE risk. If women do not know how to market, identify target consumers, and sell products regularly, they are going to take a huge loss by becoming an entrepreneur. There are clear skill sets required to be an entrepreneur and not everyone has it, nor can they be trained. HUL-type models and thinking is in fact dangerous in the BOP...

The Right Entrepreneur: The self-created entrepreneurs can become bigger entrepreneurs - these are the shop keepers, the vegetable vendors, the chai-wallas, the small restaurant owners... they reacted to a market opportunity and built a business. If we show them another opportunity, they would be willing to expand their businesses and take that risk - they have capital to expend, they have an entrepreneurial drive... it is important for us to identify them and guide them... we learned this through microfinance loans... we have seen entrepreneurs grow significantly through business loans - usually used to expand businesses, not create them. Women who herd cows and sell their milk, take a loan to buy another cow to diversify her products to sell milk and now butter. Retailers take a business loan to increase their inventory or try a new set of products because they responded to demand. Tailors take loans to buy a sewing machine to produce more clothing at a faster pace. And the list goes on and on....

At Frontier Markets, we focus on helping these types of entrepreneurs by offering them assistance with market linkages, building demand on the ground for their products, linking them to financial institutions, giving them financial literacy, and building their capacity.

Here is the overall summary:

Posted by Monica_Touesnard

See the original post here microlinks.kdid.org/speakers-corner-39-missing-links-business-development-base-pyramid-bop-communities/day-1-summary

Today’s conversation began with the premise that although many people living in poverty must be entrepreneurial in order to survive, in reality they would prefer to have stable employment. The discussion started by making a distinction between a person who is entrepreneurial versus an entrepreneur. There are numerous reasons why people who are entrepreneurial would not want to have permanent, stable employment, for example they may want a flexible work schedule or they prefer not having to report to a supervisor or they perceive that there is less pressure when self-employed. Thus, this type of “self-employment” may be a choice for some, although it does not mean that they are an entrepreneur in the tradition sense.

Those who are self-employed by choice are distinct from those we would consider traditional entrepreneurs – those who are trying to launch new businesses. Therefore, as a business trying to engage with local entrepreneurs, it is necessary to think about the type of entrepreneur you are seeking and their skill set in addition to understanding the context in which they live, work, and conduct business. However, working as an entrepreneur for a large company or multinational, is not without cost or risk. They could potentially lose everything - possessions, status, land, etc. if something goes wrong with their business. It was noted that in many instances entrepreneurs will have multiple income generating activities in order to mitigate risk and ensure a source of income.

Entrepreneurs have a distinct skill set and not everyone has those capabilities. Although someone may be resourceful and entrepreneurial you cannot necessarily train them to become an entrepreneur. It may be that self-created entrepreneurs such as shop keepers, vegetable vendors, small restaurant owners, etc. may be more willing to take risk and an ideal business partner to launch new businesses. Creating the appropriate enabling environment by providing access to markets, credit, and information, is key to ensuring their success.

While participants can continue to build on today’s discussion threads, in my next posting I will launch our next topic.

Monica Touesnard
Associate Director
Center for Sustainable Global Enterprise
The Johnson School at Cornell University

Missing Links - Business Development in the BOP

Frontier Markets has been participating in a 3-Day discussion with colleagues of Entrepreneurs, B2B services, and general business development in BOP Communities.

Here is the overall theme of Microlinks discussion on Missing Links – Business Development – BOP Communities

Posted by Monica_Touesnard

See the original post here microlinks.kdid.org/speakers-corner-39-missing-links-business-development-base-pyramid-bop-communities/welcome-bop-discu

Welcome to the online discussion titled, “Missing Links of Business Development in Base of the Pyramid (BoP) Communities.” The Center for Sustainable Global Enterprise at Cornell University believes that the private sector has a critical role to play in helping solve the world’s most pressing social problems. How it will manifest itself at the base of the pyramid is still unclear.

As the world’s population continues to grow it magnifies the environmental and social constraints of our global system. Despite technological advances, environmental problems and the number of people living in the base of the economic pyramid are increasing. Multilateral and non-profit organizations are traditionally viewed as the entities best suited to respond to and address these problems. Recently, however, companies are beginning to realize that there is an opportunity to create new business enterprises while simultaneously trying to solve these environmental and humanitarian problems. As a result, companies are experimenting with new business models in low-income communities using both old and new technologies with limited success. In addition, locally-embedded entrepreneurs are also trying to respond to local needs through new business ventures. However, it is yet to be determined who will have more success and ultimately what factors will determine successful execution.

We hope that our conversation over the next three days will explore some angles of business development at the BoP whose importance is often overlooked – the role of the entrepreneur (Day1); business to business (B2B) opportunities (Day 2); and the role of youth (Day 3). Through your contribution to the dialogue we hope that all participants will gain new insight into the issues discussed. Therefore we invite you to join us each day to share your ideas and knowledge in the discussion forum.

Monica Touesnard

Associate Director

Center for Sustainable Global Enterprise

The Johnson School at Cornell University

I will be posting the summaries of discussions on our blog for everyone to follow.

Walmart vs. Kirana Shops

VS.


In a recent article published in DNA Money: http://www.dnaindia.com/money/interview_it-is-not-easy-to-compete-with-kirana-stores-rajiv-lal_1416054

There were comparisons made between the strengths of Walmart and the strengths of the Kirana Shop. While Walmart might take over large consumer bases with its bulk and cheap prices, Kirana Shops have service and relationships that Walmart will be able to compete with...

General Description:

1. Purchases product on ad-hoc basis from wholesaler at haats (varied)

2. No sales reporting, no stock tracking, no regular purchase schedule

3. Gets avg. 10% margin on FMCG


Challenges

1. Inability to manage products or set a clear purchase pattern

2. Cannot manage funds , lack of financial planning

3. Too dependent on outside demand - do not attempt to create demand for products


Frontier Markets believes that Kirana Shops are the BEST suppliers for local households because there is a trust factor, convenient location, and these shops service households in various ways.

Through our model, Frontier Markets will build a network of retailers that are not only providing similar services and maintaining relationships, but they will be providing demanded products with high quality backing.

We will be building their capacity in the following ways:

1. Bring them into a network of preferred retailers

2. Build capacity for marketing and sales reporting

3. Provide consistent demand for products from FM field staff activities with BOP
consumers

4. Tie retailer to consumer, wholesaler and MNC company


Added Value

1. Better Sales Performance: Increased sales from consistent, aggregated consumer base and consistent demand

2. Better Margins: Gets better margins from FM wholesaler

3. Competitive Advantages: Marketing and sales knowledge is a
competitive advantage to other shops

4. Performance Rewards: High performers are rewarded directly
from the MNC

Microfinance Institutions Stepping into the Non-FInancial Game

In the past few days, Frontier Markets has been examining a few MFIs that are beginning to think about ways to support this new demand for consumer durables and other non-financial needs for low income households. Many have started creating their own non-financial business development team focusing on healthcare, education and energy. Others have begun using their non-profit arm to vet proposals before starting pilots on the ground.... all sounds great, right?

EVERYONE love a PILOT, and EVERYONE works to make sure a PILOT is successful... but what about Scale?!!!

Here are some of the challenges FM forsees for SCALABILITY...

• Staff, Staff, Staff!: right now, neither the MFI nor the “Product Company” have sufficient resources to continue educating, marketing and monitoring products to MFI members. In a pilot, there are a few company reps that work with the MFI field staff to provide such services, but this is NOT SCALABLE. The sheer costs to involve a MFI field staff for any of the aforementioned services is just too high. A product company needs to invest in that resource, but for one product, again, too high of a cost!

• Casual Sales to Meeting Targets: during pilots, we are all gauging whether a product will sell, so targets are NOT the focus. However, once we’re at scale, suddenly it is about targets, margins, and field staff incentives. Marketing and education become sales goals – it is difficult for an MFI to balance company expectations and their own loan portfolio.

• Diversified Loan Portfolios: MFIs have JUST started thinking about consumer financing… they do NOT have energy, healthcare, or consumption loan products at the moment. The question is, is it worth processing a rs. 800-2000/- loan? Most MFIs argue the cost implication – its just too high to begin creating separate loans…


Long Term Solutions:


• Building an independent non-financial staff to educate, market and monitor products and services to MFI members: having separate field staff is really the only solution to maintain quality of interaction and understanding of products. This field force will become the point of contact for all members, providing them with assistance and support on products.

• Creating realistic targets at a pace where loans can be processed and determined by the member’s capacity to purchase: the MFI has a responsibility to gauge movement of products and sales cycles. It is unrealistic to assume that a large MFI’s member base will definitely purchase every product introduced in this setting. Targets should reflect demand assessments.


• Creating energy, healthcare, product portfolios and providing a line of credit: if MFIs can understand the range of products that are in demand in each sector, they can determine a maximum loan size that can be reformed for specific products. A women can use that line of credit to purchase 4-5 consumer durables in 4 to 5 years…

From Bombay to Delhi

Frontier Markets has been interacting with interesting social enterprises, MNCs, and social investors in Bombay. We are now preparing for our next city, Delhi where we will meet with MFI networks as well.

In Bombay:

Yes Bank
IAN Network
Greenlight Planet
Unilever
Seed Fund
Intellecap
Aavishkar

We will clarify our relationships soon enough... be ready for a grand presentation early August.

Greenlight Planet

Frontier Markets recently met with Greenlight Planet's team in Mumbai, India.






Greenlight Planet is an interesting company focusing on seling low-cost solar power lamps in rural India. Their main product, the Sun King Light, ranges to about rs. 850 or $19.00 per light.


The product has won a few awards and the model for delivering lights to villages is quite promising. Greenlight is currenly operating in 3 states: Orissa, Bihar, and Karnataka.


There are many synergies between Greenlight and FM. Stay tuned for updates on them.



For more info on Greenlight Planet, please visit: www.greenlightplanet.com

Latest Updates from Frontier Markets!

Dear Friends and Well Wishers,

It gives us great joy to share with you the big news... FM has secured investors for its first round of funding. We are now ready to begin our Discovery Phase with a new MFI partner, and product companies.

We are also welcoming our new advisor, Nicola Armacost, co-founder and managing director of Arc Finance to the FM team.

Frontier is adapting its model for consumer durables - focusing on energy products like solar power lamps, smokeless stoves, low cost coolers, and other products that help generate income, savings, or livelihood skills for low income households.


Additionally, FM will continue identifying strategic partners focusing on low cost, FMCG products for low income households as well.

Please continue following us as we spend the next month meeting social enterprises, product companies, and MFIs - evaluating their products and determining the final combo of partners for Fall 2010.

Thank you,

Frontier Markets Team