Micro-equity: The future of microfinance for India

When I visited the village of Kovilpatti in Tamil Nadu on a trip with my grandfather, I saw children of my age tending to goats and poultry through the day instead of going to school. The family lacked basic necessities like clean, drinking water, and power supply. The parents of the children are neither able to expand their business, nor are they able to sustain themselves with the fluctuating income they earn. I took a moment to reflect over what I saw and felt a sense of despair over the economic disparity the country faces. I came to realize that there are so many people who have small enterprises and no scope for expansion beyond a static point because they are not provided with the necessary financial support to develop their establishments. Millions of people have been stuck at the same income level through generations because of this stagnant financial circumstance. This made me curious and upon researching, I found some shocking statistics and a potential solution to the dilemma faced by these people. 32.7% of the Indian population lives under the poverty line of Rs 27.20 in rural areas and Rs 33.40 in urban areas. This amounts to about 400 million people across the country. How can this number ever decrease if we simply do not offer effective economic opportunities to all the people who are not financially able to support themselves? With the Female Literacy rate at a measly 66%, how can we expect women in India to support themselves financially with their existing livelihoods? In fact, how is it fair that women are paid lesser for the same work done by men? As we are citizens of the country who are pretty much cushioned against the system and the hardships sustained by lower income groups in the nation, it is our duty to help provide equal economic opportunities to those people who do not get the same chances at financial growth as we do. In India, a democratic country that is secular and liberal, it is quite ironic that poor households do not get access to the financial services offered to middle-income and upper-middle income households. This is where microfinance comes into play, providing useful financial solutions to the people who are not able to sustain themselves financially over a long term because of fluctuating incomes. Through traditional microfinance, poor people who have no other option for raising capital, borrow very small amounts of money. The loans allow them to create micro-enterprises and increase their income. Although the borrowers generally lack a formal education and have limited access to basic infrastructure and resources, the industry-wide repayment rate is over 95%. But while this system helps entrepreneurs of this background, the overall system is static and unfortunately keeps a ceiling on the economic development of these people. So, although we are trying to empower the disadvantaged people, there seems to be a glitch in this system, as we do not allow them to expand their businesses beyond a certain level. At MicroGraam, we believe the answer lies with micro-equity. A strong micro-equity market potentially opens up opportunities for both micro-entrepreneurs and investors. Micro-entrepreneurs currently funded through micro-loans, have access to a new, vigorous but flexible source of equity capital would fuel growth and to help them develop their small enterprises into small-to-medium-size companies. Also, micro-equity offers greater benefits for investors as well. By using micro-equity, we seek to overcome the obstacles to sustainability by giving entrepreneurs larger sums of capital than would be available through loans without requiring them to devote a large share of revenues to interest payments. The micro-entrepreneur would have more time to use the capital and develop the business. Also, financial institutions could easily adapt to micro-equity, by introducing more inclusive financing options. As this new investment vehicle will also attract new investors, micro-equity should be viewed as a long-term investment, especially as profits increase and these businesses grow. An emerging trend in recent years has been the integration of socially conscious business practices with the efficiency and sustainability of the private sector- the goal is to create enterprises that can deliver both social and financial returns in a balanced manner. Micro-equity will appeal to

an evolved, modern investor, one who is not only socially minded but also one who believes that generating returns on invested capital will enhance the opportunities to alleviate poverty. If the model is successful in helping mediumsized enterprises develop and grow, it will also improve the overall business climate in emerging markets. That, in turn, will create a multiplier effect, fuelling economic growth, additional investment opportunities and, most importantly, job creation. The expediency and promise of micro-equity goes far beyond just being a new concept. Because of the potential of its fulfillment, micro-equity will provide more appealing investments to the base of the pyramid and effectively link social development with economic development because of the diverse effects of such investments.