Promoting financial inclusivity through social enterprise
For any developing economy, it is necessary to assess the integration of all sectors for growth and development. In Namibia, there exists a socio-economic divide between the first and second economy, thus, perpetuating inequality. There is a need to be more integrated to further economic development and bridge the socio-economic inclusivity gap. Micro Finance is one of the ways in which an economy can achieve financial inclusion.
This article aims to share the lessons learned from the ONE Nation Fund that has within a year, provided financing and capacity development, through training and mentoring, to more than 47 financially excluded and marginalised business owners.
The ONE Nation Fund, a robust low cost collateral-free business lending programme, is a response to the gap in the micro finance market which currently offers rigid and expensive products. The Fund aims to sustainably remove marginalised populations out of the vicious cycle of poverty by connecting them to financing, networks, help them save, scale their businesses and secure financial freedom. ONE Nation Fund explores alternative methods of creating synergies between the formal and informal sectors for efficient, broad-based financial service delivery. While there are already a number of micro-lending institutions in the country, the ONE Nation Fund aims to enhance the extent and the reach of lending to grassroots communities, to empower these communities and not further entrench them in poverty.
Our key learnings include the following: The need to place the entrepreneur at the centre of the product, building an infrastructure that enables their journey to financial freedom, as we have seen in some cases micro lenders and micro finance products are not responsive to the needs of grassroots communities and entrepreneurs. Majority of micro businesses, i.e. Kapana vendor, are survivalist businesses, who operate from a position of consumption instead of profit and growth. This places the business owner under immense pressure to access expensive capital from micro lenders, perpetuating the cycle of over indebtedness. Over indebtedness leads to our productive loan having to compete with cash loans in terms of repayment. The main reason for applications is driven by a need to service existing debt and to provide an additional revenue stream to cater for basic household needs. Very few applications are driven by entrepreneurial motivation.
Low to non-existent knowledge of both personal and business financial literacy amongst micro business owners. Very little evidence exists on the effectiveness of training, as most micro entrepreneurs cannot apply the learning with ease. There is a need for more effective information dissemination to grassroots communities, however, it can present challenges, i.e. lack of access to ICT, costly and labour/human capital intensive. Most grassroots entrepreneurs find it a challenge to conduct business in English. High levels of poor literacy and poor comprehension of complex English and legal terms, begs the question, how do grassroots individuals comprehend the documentation provided by formal credit offering institutions? The lack of lack of access to markets hampers growth and opportunity for upscaling.
Based on the key learnings we recommend the following essential components necessary to allow for financial inclusivity and freedom for grassroots entrepreneurs, moving them from lack to access: Focus on simplified documentation and processes. Our engagement with rural and township-based micro entrepreneurs has shown that the documentation presented by formal financiers is traditionally bogged down with legalistic terms and complex language which is difficult to understand. In addition the terms and conditions are laced with fine print and hidden costs. The ONE Nation Fund has done away with legalistic terms by developing simple and easy to understand documentation, removed all hidden costs and places emphasis on transparency.
Build financial knowledge and change behaviour. We strive to build basic business financial literacy and skill with our entrepreneurs. We believe by equipping our entrepreneurs with the necessary skill and knowledge we in turn produce a positive change in behaviour and influence entrepreneurial mindset. Due to the fact that it is a character loan, this investment into the entrepreneur in turn builds a level of trust which is essential for any financial transaction.
Build robust ecosystems to allow for eventual scaling. The spirit of partnership also plays a key role in building a robust ecosystem.
The importance of group lending in mitigating the high level of risk inherent among micro-borrowers.
The need for strengthened support to and collaboration with non-banking institutions that provide collateral free business loans and business development services in order to increase reach and impact.
Micro loans should not be easily accessible. Micro Lenders should be more stringent when it comes to affordability tests and listings on credit bureaus.
Training on basic business financial literacy and personal matters should be mandatory before the disbursement of a business loan.
The need for targeted interventions which address the fragmentation in grassroots micro lending programmes and service providers, i.e. an integrated database of products and service providers which is easily accessible to entrepreneurs and strengthening partnerships with grassroots community based organisations as feeding channels for after care service, i.e. The Shack Dwellers Federation of Namibia facilitates the group lending model.
Due to the high risk and low return nature of the microeconomic space, formal institutions are limited by the risk they can take. Therefore, organisations such as the One Economy Foundation, through its ONE Nation Fund, are uniquely positioned and can better serve this purpose by providing robust solutions to better serve the grassroots business community and in turn reduce the distressing financial inclusivity gap. More innovation is required, especially during this economic time where monetary resources are limited. We hope to see a policy and intervention focus which lends itself to early intervention, debt counseling, responsible pricing and transparency of loan products.
Although we do not see capital returns (profit), we are delighted at the prospect of social returns, of seeing meaningful and sustainable change in the lives of grassroots community members. We will continue to deepen existing collaboration with organisations in the industry, in order to play a constructive role in developing strategies which support regulatory policy to improve entrepreneurial behaviour and promote financial inclusivity.