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Washington, DC - To an audience of business executives, NGO leaders, and development experts at Public-Private Partnerships Week last Thursday, USAID announced the Development Innovation Ventures (DIV) award to support a new credit tool designed to help small-scale retailers expand their inventories.
Access to credit is a major barrier to growth for small businesses in developing countries in Africa and beyond. The costs associated with enforcing repayment is a binding constraint to expanding inventory credit in poor countries, where credit flows are too small to be enforced through the courts. USAID Administrator Rajiv Shah described the new tool as "credit that Kenyan businesses need to expand their inventories and grow.”
With support from DIV, Innovations for Poverty in Action (IPA) in partnership with Financial Sector Deepening (FSD), Coca-Cola, Safaricom, and Equity Bank, will implement and rigorously evaluate an innovative trade credit product for small-scale entrepreneurs in Kenya. The credit product leverages two technologies to dramatically lower the lender’s cost of monitoring and to make repayment more optimal for the borrowers.
The first technology is an electronic inventory management software system developed by a Kenyan software company. The software system provides real-time inventory data and enables efficient, automated, flexible and centralized monitoring of inventory levels and credit repayment histories—which lowers the cost to small firms of building a reputation for repayment.
The second is a mobile phone-based money transfer system, which lowers the transaction costs to the borrowers making repayments. They can send small and frequent payments for the price of a text message.
The DIV grant of $362,295 will fund a randomized control trial involving 1,200 Kenyan retailers selling Coke products in and around Nairobi, Of these, two thirds will receive the trade credit. While all credits will be repayable to Equity, the distributors of Coke products will be given explicit incentives to ensure repayment for half the retailers to whom the credit is offered. The study will assess the commercial viability of the product, the role of distributors in administering it, and its impact on business development and employment creation. If the intervention is profitable for lenders and borrowers, the project partners are keen to expand the credit product at a much larger scale and to other suppliers.
Dr. William Jack, Georgetown professor and one of the primary investigators of the study, explains the implications of this partnership: "If we find sizeable impacts, coupled with sustainable repayment performance, the potential for scaling and adoption by other private sector participants could be an important component of strategies to enable broad-based business development."
The results, he explains, could mean the arrival of “sorely needed financial services” for millions of small businesses worldwide.
TO LEARN MORE
- Read the full project description here
- Read the IPA press release here
- Read the announcement by Dr. Maura O'Neill, USAID Chief Innovation Officer, here
- Read the research published by the WORLD BANK, the NATIONAL BUREAU OF ECONOMIC RESEARCH, the JOURNAL OF FINANCE, and the QUARTERLY JOURNAL OF ECONOMICS
Last updated: February 15, 2013