This article (1000 words) is continuing the discussion on microfinancing, but moving from theory to practice.
Micro-financing is usually considered to be centered only on developing countries.
My usual reply?
I advise to re-read Adam Smith’s work, and see the economic activities that he was describing.
In a knowledge-based economy, microfinancing allows both providers and consumers of finance to focus on what matters: an optimal use of resources.
A new approach is required, and the next few sections will illustrate my proposed action plan, based on the observation of both the new companies’ ecosystem and the evolution of the venture and angel market in Europe (directly), in other countries (indirectly), and a review of the global microfinancing market.
A side-effect of creating development based on microfinancing is that, in the end, it is a fractal economy, as each part could then re-create the same system, without any control or oversight.
You can skip to a specific section, if you prefer.
But I would suggest to read the full article.
Anyway: each section is at most 250 word long (title included).
In the introduction to my previous article I invited you to think your own plan, before reading this article.
Think about your own plan… and then, read my next articles about microfinancing (search for “dev2009”).
I plan also to publish a mindmap online: the announce will be on my twitter profile.
Why culture matters
My approach is really simple: it is the same that I used when I had to introduce cultural changes in companies, or to define the new corporate identity of both commercial and non-profit entities.
You first listen, then talk and observe. And then talk and listen. And so on. Experience-based listening.
The secret? You have a toolset to apply to the specific culture, not just one preferred tool.
Linking microfinancing to culture implies sitting at the negotiating table with experience and access to resources, but with an open mind.
If you work in a country where community-based resource sharing is still common, it is ludicrous to force to implement a shareholding-based, capitalist approach.
It is quite common, for obvious reasons (lack of capital) that in rural areas some investments are community-based, such as the bread oven, or the water well and the pipelines.
Why? Because, overall, a shared facility that satisfies a common need allows to “pool” resources, and the shared interest ensures a positive peer-pressure in keeping and maintaining the shared facility.
The same economic ecosystem is developing with knowledge-based startups, as they often need services and products that they cannot afford, but find a way to complement each other.
For example, more than one startup that I supported had access to experts who, in turn, needed their help.
If it sounds like bartering- it is.
The side-effect? Innovation is by consensus.
The secret? Your are not just a provider of microfinance, you deliver also coaching.
Coaching, you said?
As discussed in the previous section, a community-based economy generates innovation by consensus, as it is based on shared goals and needs.
Innovation often requires to take a leap of faith, and a good coach should understand when a disruption is needed, and (s)he should focus just on the innovators.
But I would like to dispel a misunderstanding: coaching is not a one-off project, with a begin, an end, and a result.
As every change initiative, the change itself has to be supported by “cultural migration” initiatives, to help develop a self-sustaining innovative enterprise.
And this is, again, a role for the microfinancing entity- not simply to provide funding, but to provide services if and when needed, embedded in the microfinancing.
In my view, the ideal microfinancing is not just “giving money to those that cannot access the financial markets, at an interest rate proportional to the risk that their lack of access represents”.
If microfinancing wants to move beyond a new form of economic colonialism, just promoting a barely survivable consumer economy, and instead help to develop new markets, the balance should shift toward initiatives that tune microfinancing with needs, and help develop a real self-sustainability.
Creating a market
If a microfinancing entity is a commercial entity, its purpose is, obviously, to expand and reap the benefits of market-creation initiatives.
For example: what is the purpose to microfinance a family shop selling products that have to be imported, produced by the like of Procter&Gamble?
Search online, and you will see that those shops are delivering survival and a new form of indentured servitude, not development.
Developing a market for the microfinancing entity would imply identifying core needs, and supporting (for a profit) the creation of businesses that act as catalysts for further businesses.
The risk? Once the market is developed, the most successful businesses will turn into microfinancing entities (it is already happening with some village-oriented initiatives).
But, frankly, this was the way banks developed in small merchant towns in Italy, centuries ago.
Instead of stifling this development, the original microfinancing entity could actually benefit long-term if, beside the funding, were to provide constant know-how, appropriate for each development phase.
And by tailoring the support and financing to the specific type of initiative, be it community-based or innovative startup, the microfinancing entity could keep a stake in the market.
Sounds like a XXI century multinational keiretsu.
An action plan
As an example: when supporting a community-based initiative, the microfinancing entity could help them build a co-operative.
And when the co-operative becomes profitable, the microfinancing entity could help them into adding a community bank, allowing to finance innovative businesses that would not be in the interest of all the community.
What would be the end result? The microfinancing entity will be able to achieve a long-term market presence, by keeping a share in each of the new entities, while generating self-sustaining development.
A merger of the capitalist, keiretsu, and co-operative market approaches.
Microfinancing for development & innovation