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Archive for the ‘Microfranchise’ category

Increasing BOP income through mobile phones

October 10th, 2011

Great article in Jakarta Globe on how a new mobile startup Ruma is helping to increase income for thousands of poor women in Indonesia through business transactions they are performing on their mobile (cell) phones.

Ruma is creating a supplemental income opportunity for agents in rural districts of Indonesia using the mobile phone that they already own. The first product Ruma agents offer is a convenient and price competitive mobile phone pre-paid “top up” (credit) service. Since it typically costs about $0.20 in travel costs (plus time) to visit the nearest town to purchase an additional typical $0.50 of top-up credit, this service is very popular with rural customers. Ruma buys the mobile credits in bulk from all of the major mobile operators, so their agents can provide top-ups for any mobile service and they share the profit margin with the agent. This is truly a win-win.

In addition to providing mobile top-up services, Ruma is reportedly testing some additional services such as a job posting/matching service which can also be distributed by their micro-franchise agents generating more supplemental income.

Ruma’s focus on providing an opportunity for supplemental income vs. primary income is smart. This makes it easier for them to find agents who can try out their system with less risk. As Ruma expands the income generating opportunities they provide to their agents, the agents can self-select whether they want to grow this livelihood opportunity as part of their income mix or keep it as a smaller, supplemental source. As the story of the shop owner demonstrates, having a high-interest service like this can also grow their footfall (foot traffic) and revenue (turnover) for their main livelihood.

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Posted in Innovation, Livelihoods, Microfranchise, Technology

Tags: cell phones indonesia mobile phones ruma rural

Microfinance 3.0

November 18th, 2007

After spending time in India and the Philippines over the past few months with some of the world’s most innovative and fast-growing microfinance organizations from around the globe, I have a few thoughts on the next phase of microfinance which we are about to see flourishing over the next 3-5 years. I will refer to this as “Microfinance 3.0″.

“Microfinance 1.0″ (M1) is the model used to start most microfinance programs in most countries. M1 is generally started as a non-profit entity which is funded by donors and primarily focuses on developing a successful model for deploying microloans to poor entrepreneurs … which includes having a high repayment rate on loans and starting to move towards getting enough clients (scale) in order to become break-even with lessening reliance on donation capital. Most MFIs (I would guestimate 95%+) never graduate beyond M1 status.

“Microfinance 2.0″ (M2) is a new phase for microfinance which is characterized by high-growth of operations combined with professionalization, systemization, access to capital markets and new product development. The credit model proved in M1 is now rolled out at a dramatic new pace … opening new branches, hiring staff, implementing internal controls, etc. which require investments in computer systems, experienced management and access to capital which quickly outstrips the capability of donors. M2 orgs must build substantial business relationships with banks and investors who have the resources to support this new level of growth. This also means more accountability including a strong board of directors and much more detailed financial reporting to all stakeholders. Additionally, development of new and enhancement of existing financial products begins in order to better serve the clients.

“Microfinance 3.0″ (M3) is the next phase that is starting to emerge. In the few mature markets for microfinance like Bangladesh and Bolivia, many of the more mature MFIs have converted in regulated banks which is one of the options available to mature, sizeable MFIs. Generally, though becoming a regulated bank is not a feasible short or medium-term option for most late stage M2 MFIs. Instead, I am seeing “mature” M2 MFIs starting to pursue the following strategies:

Supply Aggregation. Selling the aggregated supply of their borrowers in order to increase the income of their borrowers. As one senior exec at a large MFI in India told me … the #1 business we are financing for our borrowers is milk-producing cows and buffaloes — we can organize the selling of their milk for a better price than they can receive today. Another MFI is providing the raw materials to their borrowers for making incense sticks which they agree to purchase back at a higher price than they could get themselves. The MFI then sells the incense sticks to retail and wholesale purchases cutting out many middlemen who historically took most of the profit/margin.
Demand Aggregation. Aggregating the buying power of clients/members in order to lower prices paid for goods by clients/members. This is similar to the Costco member model in the USA where members get access to products at a lower price due to their collective buying power. A MFI senior exec told me that they are seeing many opportunities to provide both products and services to their clients which save their clients money (e.g. on food staples) and give them new benefits (e.g. health insurance) at affordable prices and with improved quality over their current choices (or for the first time.)
Business-in-a-box. Anyone who has visited microfinance borrowers is struck by how hard they work to run their businesses to further their livelihoods. The fact though is that many of these people are not very entrepreneurial … that is, they are running businesses which have an upper limit to the profit potential. There are now a large number of true entrepreneurs developing very interesting self-employment (or a few employees) businesses which are like microfranchises. That is, where the business model, inventory supply, branding, portable kiosk, etc. is provided and with a little training an individual can without extraordinary entrepreneurial skills run an even more profitable mini-business.
Savings programs. Despite the central bank limitations of providing savings to the poor, many MFIs are actively investigating new ways to provide safe and helpful savings programs. One of the huge benefits of enabling savings is that a MFI can lower its cost of capital which they can then pass along in lower interest rates to borrowers. [I realize that savings are a much larger topic which I will expand in a future post!]

Is every market ready for M3? No. Many markets/countries are almost exclusively in the M1 stage and will be for some time. I am providing this proposed M1/M2/M3 framework to explain the evolution of financial services to the poor as it matures in specific markets over time. I am excited to see that the poor are increasingly being viewed as “investable” … a good and reasonable investment. While this has the risk of potential for exploitation (like with payday lending in the USA), I think that there are many more upsides overall which benefit the world’s poorest.

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Posted in Microfinance, Microfranchise

Microfranchising opens new earning opportunities

August 26th, 2007

Fast Company magazine writes an interesting article, Unplanned Obsolescence “exposing” the decreasing attractiveness of being a village “phone lady” in Bangladesh. FC is following up on a story they wrote almost 10 years ago when they first wrote about Grameen Phone, a wireless mobile service, and interviewed Laili Begum, the first woman to receive a loan to buy a mobile phone. Begum rented out her mobile phone on a per minute basis to others in her village at a mark-up over her per-minute cost. She became the first of now more than 280,000 phone ladies who are now almost ubiquitous in Bangladesh villages.

Initially, Begum was able to earn upwards of $800 profit per month which is more than 24 times what the current average Bangladeshi earns. Today she earns about $22/month profit from her mobile phone due to competition from almost 300 other close-by phone ladies plus the decreased cost for individuals to own their own mobile phone (about $30.) Overall, phone ladies now are typically earning about $60-100 of net profits per month after paying financing for phone and cost of air time.

So Begum and other phone ladies are having to operate additional business ventures to earn sufficient income. Here a summary of her status:

A decade later, instead of begging on the streets and sleeping with cattle as she once had done, Begum shares a two-room brick house with her husband, two sons, a daughter, a television set, and a refrigerator. Next door, she has built a barn, shops, and temporary housing that she rents to five poor families. Today, her banker estimates her net worth at $145,000, which may be more than everyone else in her village combined.

All I can say is “wow!” Begum was able to jump start her business with a lucrative new microfranchising business opportunity and then she took the profits and diversified into additional businesses. Very smart, indeed.

The article chooses to focus on lamenting about the lower margins available to phone ladies today as somehow pointing out the the Grameen Phone program is a failure in helping women earn their way out of poverty.

I take away a very different message and learning. Here are a few thoughts:

As with every business, high margin businesses are always going to attract more capital and competitors, so (a) take advantage of them while you can, (b) build barriers to entry where you can; and (c) particularly if (b) is difficult, start diversifying into other businesses with which have more sustainable margin. Begum did this like a pro!
So often, micro-borrowers are very uncreative with their business choices. The vast majority of them just do more of what they’ve always done or someone else is doing which can result in low or modest margins, but rarely high margins. This is why I think that there is such a huge new opportunity for microfranchise businesses … essentially one-person pre-packaged businesses which provide an attractive product/service which is differentiated and can result in higher margins. Grameen Phone used to be this.
Cash loans are so much better than specific business programs. Think if Begum had gone down the path of building her future purely around the Grameen Phone program. She would have been locked into a declining business model. Instead, she had a loan from Grameen Bank, a bank for the working poor, and she could choose over time which business ventures she wanted to invest in.

I’m going to write more about microfranchising in the future. Here are a few resources to get started with:

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Posted in Microfranchise

MicroFranchising — Another Income Generating Tool?

May 27th, 2006

One interesting (at least to me) emerging idea for defeating poverty is to make it easier for a poor person to start a very small (micro) business.

Does microfinance have a limited market? Some of the critics of microfinance have argued that most humans (including the poor) don’t have what it takes to be an entrepreneur who can successfully start a business from scratch and then continue to grow it. The critics have pointed out how so many of the poor who take microcredit loans are starting copycat microbusinesses with low profit margins and therefore questionable sustainability. The advocates of microfinance recognize this as one of the results of a free market system where you have a bell curve of success — some are very successful, most are moderately successful and some fail. All this said, mechanisms, systems and approaches which increase the likelihood of success for a business entrepreneur are welcomed by all.

Kirk Magleby, a defeating poverty activist, has done substantial research into a way to “lower the bar” — making it easier — for the motivated poor to generate more income. He refers to this as MicroFranchising. Think about how the ubiquitous Subway franchises have sprouted up so quickly across North America … and then downsize this to the size of a stall or a very small storefront and you’ll get the idea of the “micro” version of franchising.

The reason that franchises can spread so rapidly is that the purchaser of the franchise is buying a well-proven system for setup and operating a business so they have to invent less themselves. They simply go to the training course, read the manual, pay the start-up fee, find their location and then setup the store/stall according to the manual. And, presto, they’re in business. Yes, they often have to buy products and supplies from the franchise owner (single source supplier) and they also pay them a percentage of your gross sales. But often this is a worthwhile trade as the franchisee has instant brand recognition, an operating business and many other risk factors are reduced as they follow the system and services provided by the franchise owner.

So, the idea is to “encourage” both national and international established corporations to more aggressively downsize their franchising model to enable a motivated poor person to run a microfranchise. If a franchise model is micro-sizable to a minimally educated poor entrepreneur, then the large companies should be expected to rapidly adopt this model as a lucrative new sales channel.

How would the poor person pay the upfront costs to setup the business, buying inventory, etc? Often the franchising company will over finance the setup and working capital as it is a highly profitably business for them beyond just the financing. The other most promising financing source is local microfinance institutions (MFIs.) MFIs should be very willing to finance these type of operations for their quality clients as these type of businesses have much less risk than financing a similar completely independent business. This is why I view microfranchising and microfinance to be highly complementary services.

Magleby identifies a vast number of potential microfranchising businesses including almost anything that is purchased by consumers and businesses. One example where microfranchising has been successful to date is for mobile (cell) phone franchising. Here is one Vodafone example in South Africa which Magleby references.

For-profit microfinance

May 15th, 2006

There is a major positive change starting to ripple through the microfinance industry … the trend towards running microfinance institutions (MFIs) as for-profit businesses rather than non-profit charities. Today, The Wall Street Journal ran a front page article on this trend highlighting a for-profit Indian MFI, SKS, which I have visited in Hyderabad last October. Unitus, a microfinance venture capital non-profit, was very instrumental in enabling this new direction for SKS and is an early equity investor in SKS.

This trend is incredibly good news for the poor! Why? Here are a few reasons:

For profit MFIs are much more likely to continue operating for the long haul … which means that they will continue to be servicing the poor when the donated funds for non-profit MFIs move on to the next interest.
For profit MFIs are forced to operate efficiently in order to create a profit. This means that they need to create an ongoing operational efficiency culture. Over time, (sometimes even short-term) this means that the cost savings can be passed along to their poor clients in the form of lower interest rates or fees.
For profit MFIs are forced to be more transparent with their governance. Generally, this is forced upon them by regulation and their investors who want to see how their money is being used and to reduce the possibility of fraud and mismanagement. A more transparent, healthy MFI is likely to receive better rates on loans from banks which lowers their cost of capital which over time can (and will due to competitive pressures) be passed along to poor clients.
For profit MFIs can accept equity capital. That is, investors can buy shares in a MFI. This provides very inexpensive and flexible capital for the MFI which enables them to make forward-looking investments in staff, systems, expansion and other things which enable them to grow and expand. And, unlike loans, the MFI doesn’t have to pay back this capital or pay interest! Additionally, equity capital can be leveraged to enable them to borrow more money from banks which is then lent out to poor clients. So, the net benefit to poor clients is more loan money at lower interest rates.
For profit MFIs are much more likely to focus on their poor clients as “customers” vs. beneficiaries. That means that they will care about things like customer service and creating financial products which work best for their poor clients in order to retain their customers over the long-term and help their customers be successful. This potentially is one of the greatest benefits to poor clients as their needs change and evolve.

What are other benefits of a for-profit vs. non-profit? What are the downsides of a for-profit? Please post as comments.