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Solving the Rural Barrier
Source: Thunderbird School of Global Management, A unit of the Arizona State University Knowledge Enterprise. 2015. This case was prepared by Erin Bell under the guidance and supervision of Dr. Amanda Bullough, and revised and updated by Drew Helm for the purpose of classroom discussion only, and not to indicate either effective or ineffective management
Siham sat with her family and childhood friend, Leila, in their rural village of Qabatiya, Palestine. Leila had recently returned from the capital city of Ramallah. As they visited, Siham noticed her friend’s new dress while she was enjoying a handful of sim-sim (sesame seeds), a special treat Leila had brought from the city. Siham knew that several years ago Leila had traveled to Ramallah in hopes of finding a job to support her family back home. She listened intently as Leila shared her experiences.
Things were difficult at first. She had stayed with family friends, but there were often as many as 10 people to a room. Occasionally she even slept on the streets. Leila explained that job opportunities were not as plentiful as she had heard. She almost gave up hope. Then she talked to another friend, one who had started a successful fruit-stand business. Leila was impressed. The friend explained that it was with the help of a small loan designed specifically for women through an international organization that had opened the doors for her to begin her business.
Leila had always been interested in hair styling. Could she get a loan for the materials she needed and open her own hair salon? Leila learned the name of the organization, ABC International. She immediately went to the local office in Qabatiya. Her friend was right, there were loans for women! Not only had ABC International given her a loan, they also gave her some training on how to manage her finances, grow her business, and pay back the loan over time.
Siham was happy for her friend, but found it hard to imagine that there could be loans for women. She was familiar with the idea of getting loans to fund businesses. Her husband had, in fact, obtained a microloan from ABC International, to expand his business operations. But a loan for a woman to start her own business? This was hard to believe.
Siham immediately started thinking about all of the things she could do to help her growing, and increasingly expensive, family. She would love to buy some cows to add to the farm and to sell milk to other families in the village. This would help supplement their earnings after the harvest. Might she be eligible for a loan like Leila?
But when Siham remembered what it took for her husband to get the loan in the past, she felt overwhelmed and discouraged. He had to travel all the way to Ramallah, minimally a three-day trip. She knew she could not leave her three small children for that long, and who would be there to help her husband with the farm? She also knew nothing about managing money - she hadn’t even been able to finish the second grade! Her family needed her to work on the farm. Siham quickly erased the thought from her mind and went back to wistfully listening to Leila.
The problem Siham faced was one that Opportunity is attempting to overcome. Rural lending has always been a barrier in the microfinance industry, but as infrastructure and technology improve, such lenders are slowly gaining access to these more remote clients. Eager to build on the success of their model, to help women become successful entrepreneurs, ABC International has been conducting research on methods to overcome this barrier.
ABC International is one of the pioneers of microfinance lending in the developing world, particularly to women. Sami Haddad, a former president of Hopkins International, and David Raad, a Palestinian entrepreneur, founded ABC International in 1976.
While managing overseas operations, Mr. Haddad took note of the intractable poverty that plagued many nations. Discouraged by the lack of impact that programs were having at the time, Mr. Haddad and “a group of business leaders conducted market research to determine what poor people really needed. What they found surprised them: rather than asking for donations, the poor who were surveyed generally expressed a need for steady incomes that would allow them to work their way out of poverty and in to self-sufficiency.”
With these findings, Haddad and Raad developed a business model that provided small loans to individuals that the private banking industry identified as unqualified candidates. This was done with the hopes of projecting these individuals out of extreme poverty and into sustainable living, without creating dependency as giving donations often does.
While ABC International lends to both genders, their primary target has been women. This is because they are the backbone of the family and often manage money better than men – providing a higher return on the investment. When women receive loans, there is what has been termed the multiplier effect: not only do the women benefit through increased status, but they reinvest their success into their homes, their children, their husbands, and their communities. Therefore, ABC International focused their attention on where they could make the biggest impact.
Since their inception, ABC International has experienced tremendous success. The organization now operates in 22 countries, has more than five million active clients, and has a global repayment rate of 98%.
In addition to traditional loans, over the past ten years ABC International has developed multiple products and services that offer additional benefits and opportunities to their clients. Since 2000, savings, insurance, and training opportunities have been added to their catalog of offerings to developing countries.
Savings: Usually overlooked by traditional banks, people living in poverty rarely had a secure way to save their money. This often led to theft, insecurity, instant spending, and pressure from friends and family to give or lend money. Seeing a need, ABC International responded “by building a network of scalable, sustainable and accessible banks throughout the developing world […] based upon flexible minimum deposit amounts, interest rates and terms.” Now clients “have a secure, convenient way to manage money and prepare for anything from a crisis to a business opportunity.”
Insurance: This is seemingly the next wave of the microfinance revolution. ABC International was again one of the pioneers in this industry when it formed MicoEnsure as a subsidiary and incubated it through its start-up phase from 2005 until 2012. In 2012 it sought additional investors and is now a minority shareholder. “MicroEnsure the world’s first microinsurance intermediary, works with local partners to deliver financial protection against flooding, drought, hospitalization or a death in the family – safeguarding the clients against any threat to their success.”
Training: To fulfill their social mission, ABC International also provides basic financial training to clients. This is accomplished through the individual loan officers who meet either weekly or monthly with their clients. These conversations guide clients every step of the way, allowing them to achieve continuous growth as they start and expand their business.
The Rural Barrier
The next step for ABC International and microfinance institutions in general, is overcoming the rural barrier. Traditionally, microfinance primarily focused on reaching urban clients. While this is easier, it does not fully succeed in reaching the extreme poor. Until the rural demographic is served, the cycle of chronic poverty will continue. This is due to the fact that agriculture constitutes a huge proportion of a developing country’s GDP. Even in countries where this is decreasing as other sectors increase, the majority of the population remains rural. Hence, addressing economic growth in the rural and agricultural areas is key to economic development of low-income countries.
Therefore, ABC International has begun investing a large number of resources into rural expansion. These resources are gathered through grants given by private individuals, large corporations, foundations and government institutions. Through preliminary research on entering rural markets, ABC International has determined:
[t]he primary entry strategy into rural areas will be via the provision of basic savings, money transfer, cash-back, and agri-loans, helping improve their agricultural output. The need for savings is amplified in the rural areas in order to smooth seasonal agriculture cycles and support the household until the next harvest.
Overall, there are two ways in which ABC International can greatly impact the rural agricultural communities: (1) offering comprehensive financial tools, and (2) managing partnerships throughout the agricultural value chain
First, by offering financial tools, ABC International can provide farmers with loans that provide them with additional upfront capital. This upfront capital can then be used to purchase more agricultural inputs (i.e. fertilizer, tools or seeds). Currently, farmers struggle as they are only able to purchase inputs with the cash they have on hand. This usually amounts to just enough seed to supply their families with food for the year and potentially a small surplus to sell. With financing options, rural farmers will be able to purchase more up front which will not only have the potential for improving their farms’ productivity, but ultimately the potential for them to work their way out of poverty. This can be achieved by a continual increase in surpluses that will allow them to finance their own expansions or support taking out an even larger loan. As farmers experience an increase in yields at harvest time, families will be able to send their children to school and put more food on the family table.
Second, ABC International can act as an advocate for farmers by developing and managing partnerships throughout the agricultural value chain, specifically relationships with both upstream and downstream actors. Upstream relationships consist of businesses that offer the supplies necessary for farmers to produce the crops, while downstream partnerships offer specific channels in which farmers can sell their production in a marketplace. This also includes relationships with extension service providers that provide technical training to farmers in Good Agricultural Practices (GAP Training).
Together, these relationships offer ABC International’s clients more consistent pricing for either buying seed or selling their produce. As a result, farmers have to worry less about whether or not they will be able to get good quality, affordable seed or if their produce will sell for enough to get them through the year. This provides the farmer with an added amount of security and freedom to expand business ventures and possibly develop off-farm income activities. Beyond this, best practices can help improve planting and fertilizing activities, which will increase yields at harvest time.
Overall, while the need is clear, the ways in which ABC International reaches this segment of clients is not without its challenges. After considerable research, trial and error, and with a blueprint model emerging, Opportunity has identified six major barriers to entry.
Barriers to Entry
Currently, ABC International’s implementing members throughout the MENA region are facing a number of barriers to providing agricultural loans in rural communities, especially to women. Some of the barriers to entry that the organization is currently aware of and trying to overcome are:
Lack of Repayment: In general, rural populations have a poor reputation for repayment which can result in a high default rate. Though ABC International can claim a 98% repayment rate, this performance is almost completely due to urban lending. As lending reaches more rural borrowers, the repayment percentage drops significantly. As this poses a threat to a financial institution’s business development and sustainability, it is clearly something to consider when attempting to tackle the rural barrier.
Delivery Costs: Due to large distances between each client and the branch network, there are high transaction and monitoring costs associated with reaching the rural market. In addition, ABC International needs the capital necessary to establish a strong infrastructure to reach, distribute, and collect loans. Unfortunately, this hinders achieving profitability in sparsely populated rural regions of the country.
External Risks: Two different external forces have the potential to seriously affect clients and, as a result, hurt ABC International’s business. The first is the severe types of weather and disease that can hinder agricultural production. As a result of crop damage, for example, clients may be unable to repay their loans. Additionally, rural village markets experience a large amount of price volatility due to the hunger season and forward selling of crops. As such, it is hard to predict how much money clients will receive for their crops.
Household Priorities: When it comes down to it, a household will always be much more concerned with securing enough food for the family and sending their children to school than making a loan repayment. Even more, clients might not believe that the best use of the money received from a loan should even be put into purchasing additional agricultural inputs, but instead into household purchases. Thus, it is necessary to consider the client’s household habits and priorities as specific financial products and services are developed.
Client Financial Situation: Income is very irregular for farmers as it is completely dependent on crop output. With no regular monthly income, it is difficult to make weekly or monthly repayments on a loan. In addition, during the off season, families need to make sure they have money and food stored up to keep them alive. This may hinder both the amount of goods that can be sold and their ability to repay a loan.
Saturated Market: With limited skills, there is often an overlap in what type of trade is practiced in rural populations. For women, particularly rural women, they too often choose business activities that are already established. Specifically, “the rapid expansion of loans for poor women may saturate the market for ‘female’ activities or products and cause profits to plummet.”
Overall, while ABC International is trying to conquer these barriers in every implementing country, one executive director, Mohamad Chehade, addressed it head on in Palestine. As he attempted to develop a new pilot solution to this situation, he found himself running into even more country specific struggles.
The Pilot Project
Starting in 2008, Mohamad Chehade served as the Chief Commercial Officer and Executive Director for ABC International’s bank in Ramallah, Palestine. As such, he was responsible for managing the bank’s branch network, as well as leading outreach, business development and raising capital. Overall his goal was to expand operations by implementing strategies that drive business growth.
In 2009, Chehade, with ABC International Palestine, began to roll out an ambitious new pilot project to expand microloans through agricultural development in rural communities. As he began developing his business growth strategies, one of the recurring problems that the ABC International team in Palestine faced was finding a way to expand their loan portfolio in this sparsely populated, but vast country. The definition of rural in Palestine was far-reaching – including anything just outside the city limits, to isolated villages 500 miles away.
Finally, beyond the generic barriers to entry previously stated, ABC International Palestine faced three country specific barriers:
1. Farmers in their targeted area expressed some reservations about ABC International’s ability to deliver on their proposed strategy. Given past failures of some equally ambitious, but less well-developed agricultural development programs by other organizations, members of these rural communities were understandably ‘NGO fatigued.’ Associated with this, they also had to overcome villagers’ previous reliance on NGO handouts, and establish themselves as partners with the local borrowers.
2. Palestine has been plagued in recent history with weather-related destruction of agriculture (droughts). Since there was no weather insurance available given the lack of historical weather data, it was necessary to spend a significant amount of time and money analyzing the surrounding regions and identifying the lowest risk areas to maximize the potential for success.
3. Registering farmers for this project was difficult and time intensive due to the extensive distance between farms. It required procuring reliable transportation to navigate the underdeveloped roads, remote-capable infrastructure (generators, printers, computers, phones) and multiple trips to isolated villages in extreme temperatures in order to recruit, educate and sign up local farmers for participation in the program.
With such a unique geographical and cultural landscape, one of the most important first steps is to decide where to launch this new program. After determining a location, Chehade must identify the right type of strategic initiative that will overcome the many barriers to entry and result in a successful, sustainable business model.
Propose different ideas to help ABC International Palestine to expand. Your report should explain every suggested idea and you should provide relevant examples to support them. [Note: use internal & external sources to answer this question] (750 words, 50 marks)
Different answers are to be expected. The main thing is clarity of discussion and availability of proper references. Below are some ideas that you might elaborate on.
Alternatives to Traditional Microloans:
Critically discuss every idea suggested in question 1 while showing their pros and cons. [Note: use internal & external sources to answer this question]. (750 words, 50 marks)
Every idea mentioned in your answer to question 1 should be critically discussed here by showing the advantages (pros) and disadvantages (cons) of each one.
(1) offering comprehensive financial tools:
First, by offering financial tools, ABC International can provide farmers with loans that provide additional upfront capital. This upfront capital can then be used to purchase more agricultural inputs (i.e., fertilizer, tools, or seeds). Currently, farmers struggle as they can only purchase inputs with the cash they have on hand. This usually amounts to enough seed to supply their families with food for the year and potentially a small surplus to sell. With financing options, rural farmers will be able to purchase more upfront, which will not only have the potential for improving their farms’ productivity but ultimately the potential for them to work their way out of poverty. This can be achieved by a continual increase in surpluses that will allow them to finance their own expansions or support taking out an even larger loan. As farmers experience an increase in yields at harvest time, families will be able to send their children to school and put more food on the family table.
(2) managing partnerships throughout the agricultural value chain.
Second, ABC International can advocate for farmers by developing and managing partnerships throughout the agricultural value chain, specifical relationships with upstream and downstream actors. Upstream relationships consist of businesses that offer the supplies necessary for farmers to produce the crops. In contrast, downstream partnerships offer specific channels in which farmers can sell their products in a marketplace. This also includes relationships with extension service providers that provide technical training to farmers in Good Agricultural Practices (GAP Training).
(3) Introduce an innovative product like weather insurance since
Palestine has been plagued in recent history with weather-related destruction of agriculture (droughts). Since there was no weather insurance available, given the lack of historical weather data, it was necessary to spend a significant amount of time and money analyzing the surrounding regions and identifying the lowest risk areas to maximize the potential for success.
(4) procuring reliable transportation to navigate the underdeveloped roads, remote-capable infrastructure (generators, printers, computers, phones), and multiple trips to isolated villages in extreme temperatures to recruit, educate and sign up local farmers for participation in the program.
(5) conduct awareness campaigns directly
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