Leveraging Microfinance for Agricultural Lending
November 14, 2016
Calvert Foundation has approved a new $4 million loan to MCE Social Capital (MCE). This loan is a great example of how we are seeking to leverage our long history of lending to the microfinance sector to explore new areas of portfolio growth in a risk-mitigated way.
MCE is a nonprofit impact investing firm based in the U.S. that makes loans to microfinance institutions (MFIs) and Small and Growing Businesses (SGBs). For its MFI lending, MCE uses an innovative guarantor model in which a guarantor provides a $1 million guarantee that backs up to $500,000 of MCE’s loan portfolio to MFIs. Having the guarantors allows MCE to support smaller MFIs that are sometimes overlooked by larger and/or more commercial-oriented lenders.
Calvert Foundation approved its first loan to MCE in 2005, the same year MCE was founded. At the time, MCE had seven guarantors and had yet to make their first loan to an MFI. Today, they have more than 90 guarantors representing over $113 million of guaranteed capital backing a loan portfolio of close to $40 million.
As a part of Calvert Foundation’s new microfinance strategy announced in 2014, we formed a strategic partnership with MicroVest to manage our microfinance portfolio so that existing microfinance loans would be redeployed into MicroVest funds once they repaid. Our existing loan to MCE of $3.5 million was scheduled to be repaid in August 2016.
We are often asked how we find the deals in our portfolio. Typically, they come from our network, but there is also often an element of serendipity. In this case, MCE asked to use our board room for one of their regular face-to-face meetings. During a break in their meeting, Pierre Berard, MCE’s Chief Investment Officer, stopped by my desk to say hi. We both agreed it was sad that our lending relationship would be winding down. He then mentioned they had recently approved a loan to One Acre Fund.
One Acre Fund!? I couldn’t believe it! That was great news to me on several fronts. First of all, One Acre Fund is a great organization. In one sense One Acre Fund is an MFI with a focus on smallholder farmers. That is why MCE can consider a loan to them. The focus on smallholder farmers is important because according to the World Bank, 78% of the world’s poor live in rural areas and work mainly in farming. One Acre Fund has an impact on poverty, hunger and food security all at the same time, as explained by One Acre Fund Founder Andrew Youn in his TED Talk.
A critical component of One Acre Fund’s model that differentiates them from other MFIs is that they bundle their financing with inputs, distribution and training. They also engage in asset-based lending versus lending cash. They are working with over 400,000 families in 2016 and have a goal to serve one million farmers by 2020. While ambitious, one million is only the tip of the iceberg when you consider the estimated 50 million poor African households in agricultural areas in Sub-Saharan Africa alone. Acknowledging the scale of the challenge, a core piece of One Acre Fund’s growth strategy is to encourage more traditional MFIs to increase their lending to farmers. They have a significant partnership with the MasterCard Foundation to support this work. As part of this strategy, One Acre Fund is one of the founding members of Propagate, a coalition of other organizations looking for large scale solutions to the challenge of smallholder finance. The coalition includes other existing Calvert Foundation borrowers, such as BRAC and VisionFund.
Second, Calvert Foundation did a landscape study of the agriculture finance space in 2015. We see smallholder finance as one of the best ways to get a meaningful social return on our capital but the sector comes with significant challenges. This new loan with MCE enables us to do a “learning deal” at the intersection of microfinance and agriculture to build our expertise and deepen our understanding of the sector in a risk-mitigated way.
An added bonus was that this would be a way to keep MCE in our portfolio!
From a credit perspective, we take the credit risk of MCE’s whole portfolio with the benefit of the guarantor protection. MCE appreciates the flexibility we provide in structuring our amortization schedules. This allows MCE to have a very efficient cash flow management system by matching, for example, OAF’s loan repayments to MCE to the payments MCE will make to Calvert Foundation.
Another huge plus of maintaining our lending relationship with MCE is the chance to learn more together about SGB lending through MCE’s Small and Growing Business Fund which also skews towards agriculture.
Our first disbursement to MCE will be on-lent to One Acre Fund. Future disbursements will be on-lent to MFIs, particularly targeting those with substantial agricultural portfolios. Up to 10% of our total commitment can be on-lent to SGBs, again with the intent to fund those in the agricultural sector and serving smallholder farmers.
You can support our work with MCE with an investment of as little as $20 through Vested.org.