Caption: In partnership with USAID, MCE Social Capital is launching a fund dedicated to supporting small and growing businesses like Komaza, a African forestry company that unlocks the potential for small-scale farmers in Kenya.
Loan guarantees—where a third-party pledges to assume the debt obligation of a borrower—have helped people access otherwise unobtainable capital since at least early Roman times. (See the June 2015 essay for the Council on Foreign Relations, “Loan Guarantees and Financial Inclusion in the Developing World.”). MCE Social Capital (MCE), a nonprofit impact investing firm, was founded in 2006 on the belief that this ancient finance mechanism could uniquely unlock private sector capital for businesses and entrepreneurs in developing countries.
In the past ten years, MCE has used it pioneering loan guarantee model to make over $118 million in loans to microfinance institutions (MFIs) in more than 41 developing countries. The MFIs have, in turn, made more than 400,000 loans and delivered health and education programs to hard-working people supporting 1.9-plus million family members.
These loans were made possible by MCE’s Guarantors—typically accredited investors, trusts, or organizations registered as a U.S. 501(c)(3)—that sign a Philanthropic Guarantee Agreement (PGA) pledging to make a tax-deductible contribution to MCE if—and only if—a MFI to which MCE has lent money fails to repay its loan. On the strength of these loan guarantees, MCE borrows capital from financial institutions and accredited investors.
Now, powered by a catalytic $1 million grant from USAID’s PACE Initiative, MCE will replicate its loan guarantee model and launch a new fund to make flexible, customized, affordable loans to Small and Growing Businesses (SGBs) in Sub-Saharan Africa and beyond.
SGBs—which generate approximately $20,000 to $10 million in annual revenue and have 5-250 employees—constitute the dominant form of job creation and entrepreneurial activity in the developing world. In sub-Saharan Africa, for example, SGBs represent approximately 90 percent of the region’s business operations and over 50% of employment and GDP. Yet 45 percent of these SGBs lack access to loans or a line of credit that would likely spur growth and scale.
Even when loans for SGBs are available, limited competition and regulation mean that interest rates can exceed 15 percent per year. Moreover, institutional lenders are often not nimble enough to customize their investment to a SGB’s specific business needs. This significant gap in available financing is particularly devastating for women in rural areas. The IFC estimates, for instance, that approximately 70 percent of women-owned SGBs globally are not serviced by or are under-served by financial institutions.
With its new SGB Fund, MCE will use its loan guarantee model to unlock millions of dollars of private sector capital to finance SGBs in Sub-Saharan Africa and other emerging economies that are working in agriculture value chains; clean energy; and water, sanitation, and hygiene. MCE will focus in particular on SGBs that are women-led, include a majority of women in their supply chain, specifically develop products or services for women, employ a majority of women, and/or have a majority of direct clients who are women.
In advance of the SGB Fund’s formal launch of a new loan guarantee pool in January 2017, MCE has already used its own retained earnings and donations to make nearly $1 million in loans to SGBs. Komaza in Kenya, for instance, helps thousands of farmers living in extreme poverty cultivate profitable Eucalyptus tree farms. CDS in Mauritania, as another example, provides safe water and electricity to rural populations living in remote communities. MCE is also building a robust ecosystem of implementation partners. One such partner, Investisseurs & Partenaires, focuses on SGBs in Africa, primarily leveraging equity instruments that are complementary to MCE’s debt financing.
MCE is proud to partner with USAID’s PACE Initiative to launch the SGB Fund. By leveraging the power of loan guarantees and its proven loan guarantee model, MCE will address a critical market gap and achieve USAID’s goal of sparking innovations that accelerate the creation of promising, high growth, and sustainable entrepreneurial ventures.
This blog post is part of USAID’s Global Entrepreneurship Week Blog Series, which focuses on the importance of entrepreneurs for development, the challenges they face, and innovative models being developed to address them.