A small and medium enterprise development initiative sponsored by the Results for Development Institute (R4D) has won the early entry prize by Ashoka Changemakers as part of the G-20 SME Finance Challenge. The project, conceived by R4D Senior Fellow David Stevens and called “The Local Currency Guaranteed Development Bond SME Loan Program” was honored from among 86 early entrants to the competition, which is open to additional entrants through September 5, 2010.

View the project web video below:

Additionally, click here to read the feature story on the Ashoka Changemakers website.

Up to 15 later stage winners will be invited to the November 2010 G-20 Summit in Korea to be recognized for their innovations. Winners will then be connected with donors and investors at an SME conference in Germany following the Korea Summit. The early award to R4D does not guarantee that its entry will be among those invited to Korea, but, says David de Ferranti, CEO of R4D, “It helps illuminate what the judges are looking for, positions us well for the later stages of competition, and confirms that our ideas are receiving some very gratifying acceptance in the development world.”

The G-20 is seeking to mobilize the public share of the funding needed to implement winning proposals. The International Finance Corporation, the World Bank, the Asian Development Bank, the Inter-American Development Bank Group, the African Development Bank and the European Bank for Reconstruction and Development have all indicated their support for implementing scalable and sustainable SME financing proposals, including those from the Challenge, in partnership with the private sector. For the United States, the Overseas Private Investment Corporation (OPIC), has indicated an intention to offer project support (financing and insurance) in concert with U.S. private investment.

David Stevens heads a team of four who work with R4D on development finance matters. This is the second development finance award for the team this year, as last March they walked off with one of the five first prizes at the Marketplace for Innovative Finance, sponsored jointly by the World Bank, the Gates Foundation, and the Agence Française de Développement, for their proposal for a financial guarantee initiative aimed at the developing markets, Affinity MacroFinance. Joining Stevens on the team are Marianne Pellegrini, David Greenleaf and Garrett Wright.

“We are very grateful for the interest in our project on the part of the G-20 and Ashoka Changemakers,” Stevens said. “We’ve been working on this project for the better part of two years, with some critical early support from US AID. The biggest challenge has been getting the relatively small amount of seed funding to kick-start our three mandated programs in Rwanda, Uganda and Nigeria. This first-stage award invests our program with extra credibility, which will help us attract partners. If we are fortunate enough to win a significant award in the later stages of the competition, we definitely will be able to get these programs off the ground.”

The R4D program began with early research conducted by de Ferranti, who identified the need for development agencies to focus on the “missing middle” of businesses in developing nations (microfinance and large local corporations are generally adequately funded, but large scale economic growth will only occur if SMEs can be catalyzed across the developing world
Stevens and his team built upon this notion by researching some successful developed-world SME financing models in a search for best practices, while also conducting an assessment of international programs. Their research uncovered some significant concerns which a new SME financing program needed to address. Developing world SMEs need long-term, low-cost, fixed rate capital -- but the typical SME loan is short to medium-term, very high cost and interest is on a floating basis. In addition, many programs are funded by developed world donors, and currency risk is pushed onto the parties least able to bear it, developing nation entrepreneurs. The research also uncovered spotty loan repayment records – some programs did quite well while others suffered large loan losses.

Finally, many donors focus on providing equity to SME entrepreneurs but, in Stevens’ words, “Entrepreneurs being entrepreneurs, they tend to want capital more than they want partners.” He adds that, given the lack of financing for SMEs in many nations, they are often overcapitalized with equity because of the dearth of borrowing opportunities.

Stevens and his team developed a program that addresses these issues through planned issuance of local currency-denominated 15-year bonds. The bonds in most countries are purchased by the central government in partnership with local pension funds. The pension funds take the least risky portion of the bonds, further supported by a financial guarantee, which OPIC has expressed interest in providing. This allows countries to largely self-finance their SME programs and reduce their reliance on foreign donor aid flows.

“Our SME program is properly viewed as a partner to Affinity MacroFinance (AMF), our companion development finance initiative,” Stevens said. “AMF will be able to use the financial technology on display in the SME program to mobilize various other forms of development finance, for housing, health care, education, microfinance, renewables, infrastructure and other forms of essential public services. We are very excited about moving forward with both AMF and the SME program and are grateful for the support and sponsorship of Results for Development.”

The project funder is the G-20 SME Finance Initiative.