Impact (investing)
By Timothy
We feel grateful to work with our client organization because their visionary leaders understand how to mobilize and unite farmers around an opportunity that will increase their potential for production, increase income, and improve their practices to protect their land for the future while lifting the community through cooperation, financial literacy, and technical support.
Our IM860 project required our team to learn quickly about impact investing and alternative credit as they relate to developing agricultural regions. From microfinance to international development banks, there are a range of models, but the challenge is the same: 1. demonstrate the likely financial and non-financial benefits of a project and 2. create an efficient operating model that best ensures repayment to investors.
Over the course of our research, we saw creative examples by established impact investors. Root Capital’s “triangulated” loans provide funds to coffee farmers which helps to certify coffee as Fair Trade and fetch a premium on international markets. Then, the buyers of the coffee repay Root Capital directly, simplifying the process of loan repayment and collection. Another alt-credit mechanism used by impact investors in providing equipment loans to smallholder farms is to retain ownership of the equipment until the loan is repaid. These clever models for minimizing opportunities for misused funds and loan default emerged from our research. Another tool for improvised credit, that I could not have fully understood from research alone, has emerged from working with our client.
Our client, and the cooperative of farmers we are targeting for equipment loans, understands that the social ties within the region’s farming community is key to the success of their project at scale. Securing funds for their first-of-its-kind solar irrigation pump projects will be hard initially, but they understand that after demonstrating a few successful projects, this type of investment could potentially be scaled to reach thousands of farmers in the region. As a result, the successful repayment of these loans has massive implications for their community, cooperative, and livelihoods. The community of farmers are depending on each other to repay loans to maintain favor with investors to secure additional loans for other farmers in the cooperative in the future. This pressure within the farming community will help incentivize repayment in the absence of traditional credit or collateral.
At the end of the day, repayment by the first tranche of loanees will be crucially important. As a result, our client and the farmers interested in piloting these pumps are approaching the project with appropriate urgency. Any loan defaults would burden the other farmers in the area who are interested in pooling their financial resources to support a collective effort to secure financing. Certainly, this social pressure is another powerful incentive that can be combined with the models we have uncovered in our research.
We feel grateful to work with our client organization because their visionary leaders understand how to mobilize and unite farmers around an opportunity that will increase their potential for production, increase income, and improve their practices to protect their land for the future while lifting the community through cooperation, financial literacy, and technical support. Not only has the organization’s understanding of the farms and farmers in the region been critically important, but their ability to leverage the collective power of their community and cooperatives was only possible because their creative and charismatic leaders understand the community and its values. While our client builds relationships and organizes the farmers in the region, our student team will support their work by strengthening the financial models they plan to present to investors and recommending an operating model that will entice investors.
In the end, we look forward to the chance to help demonstrate the potential of this community of farmers to produce financial and non-financial benefits for the region.