Originally published in: Forbes
By: Michael Lindenmayer
SPARKING A JOB REVOLUTION
There is a global shortfall of 1.8 billion formal jobs. What is needed to address this is a job creation revolution. There is an alliance which is driven by this mission: Aspen Network of Development Entrepreneurs. Also known as ANDE. This is an Aspen Institute initiative. I recently interviewed its Executive Director, Randall Kempner.
MOVING ON FROM MICRO-CREDIT
For the past three decades, people have looked to micro-finance as the main solution for job creation. The challenge is that most micro-enterprises remain tiny. They employ 5 or fewer people. Randall believes that the key to sustained wide scale growth and employment creation will emerge in small growing businesses, the kinds of companies that we in high income countries call SMEs.
FOCUS ON THE MEDIUM-CREDIT MARKETPLACE
In high income countries, 66% of employment is generated by SMEs. In low income countries, this figure hits at 78%. The question is what is needed to exponentially expand the number of entrepreneurs who build enterprises that employ 20 or more people. The key is access to finance.
Randall says that finance institutions are missing the middle market opportunity. Banks either migrate to loans below $20K or focus on lending in the $2m plus zone. According to a McKinsey-IFC report, this missing middle clocks in at $750 billion in potential lending opportunities. Randall says that when you factor in private equity demand, the total market opportunity is closer to $1 trillion. With such a massive opportunity, the question is how to tackle the main roadblocks stunting the growth of this marketplace.
Randall says that one of the keys to micro-credit’s early success was its focus on lending to women cooperatives. Once the initial loan was repaid, it provided a group credit score. Each loan had multiple stakeholders who had a vested interest to see each loan repaid. Micro-credit financial institutions also worked at a grass roots level to familiarize themselves with their lenders. It was relationship based banking.
In low income countries, there is a massive gap in credit scoring tools for evaluating SMEs. In these countries the middle market is largely comprised of informal players that lack clear, consistent and reliable financial statements. As such, commercial lenders stick to their comfort zone and lend to large companies and public institutions.
In order to advance the middle market, ANDE’s members have focused on two things, education and entrepreneurs.
EDUCATION AND ENTREPRENEURS
ANDE’s members are working hard to empower entrepreneurs through education. They are raising the bar in the area of reporting and measurement standards. They are also helping investors in high income countries understand the metrics they are using to select opportunities. One such initiative is IRIS (Impact Reporting and Investment Standards).
Their other goal is to find ways to develop alternative credit scoring mechanisms. Harvard’s Entrepreneurial Finance Lab, highlights that it was not until the 1990s that US banks finally penetrated the SME segment on a large scale. This only happened when they shifted their focus from reading business plans to evaluating the entrepreneurs themselves.
Randall says that there are emerging credit rating alternatives which zero in on the potential of the entrepreneur. He spotlights the efforts of EFL. They have developed an effective tool to identify high potential, credit worthy entrepreneurs. These tools are based on psychometric principles.
These psychometric screening tools measure future upside potential rather than traditional risk management tools used by banks for debt contracts, which only measure downside risk. Leading banks like Standard Bank and BBVA Bancomer have successfully leveraged this tool to expand their lending capacities to the missing middle.
Randall sees tools like these and other innovations as essential to encourage the growth of the middle market. He is committed to creating the space, alliances and exchanges among leading players in the field to accelerate this innovation cycle.
CHAMPIONS OF THE MIDDLE
Aspen Institute has a long history of creating change through its gathering power. At present, ANDE is comprised of a 167 organizations committed to serving the missing middle. These include pioneering financial institutions like Acumen, Vox Capital and Root Capital, as well as leading foundations like Rockefeller Foundation, AVINA and Skoll Foundation.
On a bigger scale, Randall hopes to spark a movement similar to the one which emerged around micro-credit. He sees ANDE as anchor piece of this movement building process.
Stay tuned for more purpose driven stories from ANDE. I will be doing a series of field note interviews with the various champions of change which make up the ANDE membership.