The Next Generation of Microfinance: Microfranchising

[microfranchising [mahy-kroh-fran-chahyz-eeng] noun – the systematization and replication of enterprise models that are designed to alleviate poverty]

Microfinance Institutions have built the relationships and framework for delivering market access to the poor. But credit and entrepreneurship alone cannot build a strong economy. How can we use microfinance channels to deliver additional value that strengthens local economies and tackles poverty? Microfranchising, says Melissa Richer, the Founder of Ayllu, could be the way forward.

Microfinance is booming, and support systems such as research, consulting, and advocacy have emerged to help the industry mature. This consolidation process is making it easier to evaluate microfinance’s successes and limitations.

Grameen Bank argues that MFIs should act as a platform for many products and services, rather than offer just one financial product. This is because the poor, and especially the destitute, need access to more than just credit in order to repay a loan. They need access to social services like healthcare, housing, and food.

An obstacle for organizations that deliver social services is forming relationships with the poor, which is an expensive process that takes years. A key to MFI success is high-quality relationships with their clients. In fact, according to Alex Counts, CEO of Grameen Foundation USA, an MFI’s most important asset is its relationship with the poor, not its loan portfolio (Alex Counts, Reimagining Microfinance).

MFIs can leverage their high-quality relationships to act as a distribution channel for social services. A platform approach prepares borrowers for success, thus increasing an MFI’s potential for long-term success. It also encourages MFIs to constantly innovate by experimenting with new offerings (either directly or through partnerships) that can help overcome industry-wide limitations.

Microfranchising, the systematization and replication of enterprise models that are designed to alleviate poverty, can help MFIs meet their social and financial bottom lines. Unlike traditional franchising, a microfranchise is a branch of the franchisor that can be owned by a corporation or by the franchisee. In exchange for operating the microfranchise, the franchisee is insulated from market shocks, and receives training and mentoring from the franchisor. The best franchises operate with a strong community feedback loop where experimentation, continual learning, and adaptation can take place.

One microfranchise is IkoToilet, a sanitation company in Nairobi, Kenya, that charges a small fee to access its toilets and washing facilities. IkoToilet acts as a “toilet mall” and attracts users through services like shoe shining, refreshments, and newspaper stands. The franchise owners use the facility’s biogas generators to convert waste into fertilizer. Each IkoToilet franchise serves 1,000 customers per day and employs 10 people and the company plans to open 200 facilities in the next five years.

Every day more market-based solutions like IkoToilet are born. These businesses are social enterprises, but in order for them to profit from low-priced products for the poor, they must reach economies of scale. Scaling is one of the greatest challenges for social enterprises. Microfranchising offers a way forward. Nonetheless, hardly any mechanisms or capital exist to help social enterprises franchise their models or access new markets.

Currently, MFIs do not offer services to microfranchises in a systematized way. But doing so would improve the banks’ social and financial bottom lines. First, take entrepreneurship: many microcredit recipients are not entrepreneurs by choice, but are rather forced to become self-employed because they don’t have a job. These borrowers tend to copy other businesses, which makes it harder to compete and repay loans. Entrepreneurs do not usually make the best microfranchisees. Rather, individuals who are comfortable with structure, management, processes, and procedures make good microfranchise owners. For the MFI, this diversifies the market while also lowering the risk of loan default because the business model is already proven.

Second, microfranchises create new jobs, which is something microfinance has been unable to fully accomplish. Many microfinance clients use their earnings for personal expenses such as healthcare, food, and education for their children. These investments have immediate returns and are considered less risky than reinvesting profits in business growth.

For example, the global microfinance network FINCA found that most businesses were plateauing early and the entrepreneurs were not hiring additional people. What’s more, although borrowers sent their children to school, after graduation these youth were unable to find employment. FINCA realized that while microcredit was mitigating the effects of poverty, more needed to be done to stimulate economic growth. Realizing that microfranchises create two- to-three more jobs on average than microenterprises, FINCA conducted a feasibility study on microfranchising with George Washington University that concluded, “Microfinance can provide the capital needed for self-employment, while microfranchise opportunities provide the capacity to develop businesses strong enough to generate continuous growth in sales, jobs, and profits.”

It’s easy to see the benefits of incorporating microfranchising into microfinance portfolios, but how can this actually be achieved? There are a few rare cases of MFIs that have lent to microfranchises on a location-by-location basis, but the knowledge and methodologies that would allow this to happen in a largescale way have not been developed yet. In addition to the fact that social enterprise and microfranchise options are scarce and most MFIs never encounter them, the cost to MFIs is prohibitive because microfranchise loans tend to be expensive, unproven, and risky.

The Ayllu Initiative in Brazil addresses this market gap. Ayllu seeks to aggregate microfranchise options and partner with MFIs to offer these options to communities. By pooling social enterprise franchises from around the world, Ayllu will lower the risk, to both MFIs and impact investors, of including microfranchising in their portfolios. After working with local partners from a target community to perform market analysis and microfranchises, Ayllu will assist MFIs in extending their services to microfranchisees from that community.

Basic services like healthcare and education that the poor require in addition to microcredit do not have to be handouts. Microfranchised social enterprises can help deliver these services profitably, allowing MFIs to invest in their short-term viability (immediate returns on loans) and their long-term viability (building human capital in the community). Ayllu’s goal is to capture core learnings and develop methodologies that MFIs can use to invest in microfranchising.

If microfranchising and microfinance work together, they can more easily reach the four billion people living in poverty. Knowing that the presence of just one social enterprise can change millions of lives, imagine the power of many social enterprises in one place! By introducing microfranchises that solve problems like waste, water, healthcare, and sustainable agriculture, the poor can make a living by taking control of the problems that affect them each day.

Three Successful Microfranchises

1) SELCO Solar Light, India—These lighting systems for low-income consumers receive specialized financing from MFIs. The beneficiaries become solar entrepreneurs by leasing solar lights to street vendors at night.

2) Sustainable HealthCare Foundation, Kenya—Microfranchised pharmacies are owned and operated by health workers and nurses in low-income areas.

3) RedPlan Salud, Peru—INPPARES, the franchisor, purchases bulk contraceptives from pharmaceutical companies, which are then distributed by a network of professional midwife franchisees.

Melissa Richer is the Founder and Executive Director of The Ayllu Initiative, a US-based ‘hybrid’ nonprofit whose purpose is to help social enterprises scale by franchising their models. She currently lives in Brazil, where Ayllu is launching a pilot program in collaboration with local social enterprises, microfinance institutions, and communities