As with other impact investors, the rate of return is not the key issue for Root Capital. Poverty reduction and empowerment of small enterprises are highest on the wish list for this investor company based in Boston, USA. The company has for 13 years been focusing on smallholder farmers primarily in Latin America, and since 5 years, also in Africa. They have provided 1100 loans of an aggregate amount of $350 million to 350 different enterprises. The repayment rate of these loans is 98%, an impressive rate commercial banks have a hard time beating.
During the SOCAP Design the Future in Malmö, Catherine Gill and Saurin Nanavati sat down to talk about their business model as a way to impact. However, not only the direct clients and their communities, but also influence other impact investors through demonstration effects.
High Touch Lenders
The problem in developing countries’ agricultural sector is of neither demand nor supply, but the fact that the market mechanisms to make the two meet are malfunctioning. Enterprises and cooperatives cannot buy the produce from the farmers due to lack of working capital. Root Capital bridges this gap and provides finance to Small- and Growing Enterprises (SGEs) in the agricultural sector, to be used for seeds and agricultural inputs, but also working capital and other expenses. When the enterprise later sells the crop on the market, it can repay the loan from the revenues. “It is really not a complicated process, but to get there is really complicated.” says Catherine. She explains that the key in their business model is to not only provide the cash but also to build local competencies to handle the finances. Focus on training in financial management means that the investor needs to commit long term and create a relationship with their clients. By really engaging with their clients and be what they refer to as a high touch lender, the company is building up the businesses in order for them to be strong and scalable enough to attract commercial loans. Saurin: “We are building up the organization to make them diversify their loans, a.k.a. getting other lenders. If or when that happens, that is a proof of success.”
A Capital Niche Market
For obvious reasons, small scale lending to high-risk and financially illiterate clients in rural Latin America has not been big business. But things are changing and we are approaching a moment where more institutions will be looking at agricultural lending. They are, however, still mostly focused on the upper-middle segment where risk is not as high. Root Capital is welcoming more investors on the market and is hoping that their business model will help other investors to see the viability of financing smallholders.
Catherine says, “We are looking to spur that entry, while maintaining a strong focus on the least served. We are trying to cover the barriers of entry by de-risking the smallholder farmers for other investors.”