By the Nguriza Nshore team
Feed the Future Nguriza Nshore is applying systemic lenses and tactics to shift the orientation of the financial services market system in Rwanda. Nguriza Nshore is focusing on two major shifts in the financial services market system. The first is shifting the orientation of the banking and microfinance service providers toward the SME segment. This shift requires banks and micro-finance service providers to shift their operations and product offerings to accommodate the specific needs of SMEs and the SME segment. The second is shifting the overall balance of enterprise finance away from banks and microfinance service providers and toward private capital that can more effectively serve the growth capital needs of Rwandan entrepreneurs.
While most financial services projects focus only on bank or loan-based financing for SMEs, Feed the Future Rwanda Nguriza Nshore (Nguriza Nshore), a project funded by the United States Agency for International Development (USAID), is putting equal weight on other types of financial services. In particular, Nguriza Nshore is supporting the emergence of more robust private capital options. Private capital is when an organization or investor, such as angel investors, investment funds, impact investors, etc., use their private capital to invest in selected SMEs/firms. While traditional lending organizations make a margin from the difference between the cost of lending (including the cost of the funds lent) and the interest and fees charged to the borrowing SMEs, private capital investors tend to make revenue or a return through a share of the benefits in firm performance. Typically, this occurs through the value of the firm increasing over time, of which the investor owns a portion (i.e., shares in the firm/SME or equity).
In Rwanda, as in many developing countries, the perceptions, cultural norms and mechanisms that allow for private capital to emerge are nascent, making such investments rare. As a result, very few Rwandan SMEs or corporations access private capital financing beyond informal friends and family networks. At the same time, systemic shifts in support of private capital such as high levels of liquidity, high growth rates, shifting norms around ownership, etc. are emerging quickly. The pace and process of change in favor of private capital has been uncertain at times, which is why Nguriza Nshore is working to catalyze the emergence of private capital that is inclusive, fair, and merit based.
Nguriza Nshore is supporting initial transactions that can form an attractive demonstration to both SMEs and investors alike. Given that both SMEs and investors are limited in their understanding of risks and potential benefits of private capital in a Rwandan SME context, Nguriza Nshore has had to actively engage on both sides. For example, most SMEs in Rwanda are driven by short-term demands for cash including personal/family demands, which as a result encourage SMEs to act in ways that can limit their growth and value to an investor. Therefore, a vital issue is to help SMEs realize that they often need to restructure for longer-term growth. This encompasses many aspects of their business — customer orientation, brand value, alliances, data management, decision-making, etc., — but most important is how they manage their human capital. Finding and supporting SMEs that are hungry for growth and demonstrate an openness to partner with investors to achieve more than they can on their own, is of utmost importance to an SME becoming investment-ready.
While finding SMEs with the right mindset is essential, it is not sufficient. Additionally, there are many technical and practice performance improvements required for an SME to become investment-ready. Nguriza Nshore seeks to build the ability of local market actors to deliver needed technical assistance, but as the overall ecosystems are still evolving, Nguriza Nshore often has to step in to fill technical assistance gaps and generate a flow of viable transactions.
Dedicated technical assistance in areas that prepare SMEs to be investment-ready are crucial. Most SMEs are in critical need of improving business management, building a sustainable business model and ensuring value creation. Nguriza Nshore works with several business transaction advisors, who normally have a pipeline of business opportunities looking for financing. Once the businesses are registered with transaction advisors, and an assessment of their investment readiness or lack thereof is established, Nguriza Nshore comes in to provide the necessary technical support to close the deal. It should be noted that it is only those businesses that are judged to be close to concluding the deal that are facilitated and enabled to be investment-ready, as it is critical to catalyzing systemic change that early investments are successful and provide an attractive demonstration, building momentum for more SMEs, investors and technical advisors to enter the private capital market.
By the Nguriza Nshore team
The financial systems change wheel was developed to help the Feed the Future Nguriza Nshore staff track a more comprehensive set of factors influencing how the financial service market systems functions. Through the use of the wheel, the Nguriza Nshore team has been able to see how the EDP’s implementation is more important for increasing the inclusive growth potential of entrepreneurship in Rwanda than having a perfect written policy that never gets implemented effectively. Further, the wheel is helping the Nguriza Nshore team see how changing the banking and microfinance services also entails other interconnected systems. The wheel is also helping the Nguriza Nshore team track its progress towards systemic change.
Feed the Future Rwanda Nguriza Nshore (Nguriza Nshore), a project funded by the United States Agency for International Development (USAID), has been grounded in systems thinking from the start. The three project components, for example, are also interconnected and interdependent. Credit based finance is important, but not sufficient to catalyze a growing inclusive economy, so mobilizing private capital is also essential. At the same time, bank finance and private capital cannot effectively allocate financial resources if the rule of law and policy environment remain uncertain or highly biased against clear, consistent, and transparent rules of the game.
The Nguriza Nshore team realized the importance of the interconnectedness but did not have a way to define and highlight interconnectedness. As a result, the team, in concert with EcoVentures International, developed a financial services system change wheel (finance wheel). Based on the agricultural market system change wheel published by USAID, the finance wheel provides a graphic representation of the system and its interconnectedness. The team is using the tool to track their activities against wider systemic forces and dynamics allowing the team to adapt more effectively to emergent threats and opportunities. The finance wheel also provides a normative pathway to self-reliance that the team can use to gauge where momentum is growing and where change has stalled or needs more support. The combination of defining interconnectedness and a normative pathway gives the team an important tool in managing how best to work in and across their components.
View a draft of the Financial Services Market Systems Change Wheel below.
Written by ACDI/VOCA Transforming Market Systems Activity in Honduras
The blog focuses on some of the more near-term adaptations that firms have done/are doing to better weather the challenges resulting from covid-19. Certainly, shifting to known channels that are still operational, including on-line channels, is important, but from a systemic resilience perspective it only scratches the surface of what will be important to learn. It will be interesting to hear what TMS learns about connectivity, power and diversity and how these factors affect firm/industry resilience. For example, what supporting services are central to being able to adapt, especially to channels that were previously unknow to the firm. An additional important question for TMS would be, how does a shock also presents an opportunity for systemic change. For example, it could be assumed that connected and powerful firms will weather this shock better, which is likely to result in those firms coming out of covid-19 in a substantially improved competitive position. If this is a real possibility, should projects think more systemically about which firms should get assistance, focusing more on firms that could/would catalyze substantial shifts in the competitive landscape coming out the shock? TMS is at the forefront of thinking systemically and it exciting what they will learn as their research continues.
With the ongoing COVID-19 crisis, people and businesses around the world are facing unprecedented challenges. This is particularly evident in countries like Honduras that have fewer resources to cope with and adapt to the shock. For many businesses, social distancing measures mean lost revenues and forced decisions about how and whether to continue operations and retain employees.
In Honduras, compelling data gathered by the USAID/Honduras Transforming Market Systems (TMS) Activity shows how well businesses are adapting to these challenges. The data was gathered through a survey of 1,178 enterprises from 16 out of the 18 departments in Honduras and across 17 economic activities. The survey demonstrated that the resilience of a business was closely aligned with their willingness to adapt their business model. This has widespread implications for the evidence-based decisions that public organizations, entrepreneurs, and the government will need to take to mitigate losses and support recovery.
Coping With Distribution Chain Disruptions
The TMS Activity is working closely with Honduran businesses, their chambers of commerce, and the government to identify solutions to the unique problems stemming from the COVID-19 crisis. Our approach involves looking at the entire value chain to determine what changes, improvements, and relationships can be initiated that will affect not only the large distributors in Honduras but also the small farmers at the beginning of the chain. This means acting and adapting quickly to develop interventions that will help businesses be more efficient and well-positioned to expand by connecting distribution channels and offering relevant and timely technical training.
Earlier this year, with support from the TMS Activity, JJ-Agro inaugurated the first hydroponic strawberry production unit in Honduras through a $200,000 investment in greenhouses. JJ-Agro is a major supplier of potato, cabbage, broccoli, and cauliflower for Walmart and several Honduran supermarkets. The planting of 54,000 strawberry mother plants offered export potential and the opportunity to diversify revenue streams. However, shortly after the first strawberry harvest, the COVID-19 crisis struck, and export channels were blocked.
KEY TAKEAWAY 1: Manufacturers in Honduras are more likely to be affected and less able to cope with the impacts of COVID-19.
To quickly adapt to the crisis, the TMS Activity helped JJ-Agro rapidly diversify its distribution channels. We linked JJ Agro with a Tegucigalpa-based produce delivery service, Pyflor, and a San Pedro Sula-based produce delivery service, Yojoa Trading Company, to sell their first harvest of strawberries. Over the last two weeks, JJ-Agro was able to sell 3,000 pounds of strawberries through these services, avoiding product and job losses and opening relationships and growth pathways.
“Our clients are extremely satisfied with our product and we are now sold out of our first batch of strawberries. We are launching our first marketing campaign this week, and everything is thanks to the work and support of [the TMS Activity].” — a JJ-AGRO manager
KEY TAKEAWAY 2: Transformative resilience capacities, such as the capacity to find new buyers, are linked to the level of confidence a Honduran business has to recover from COVID-19.
Overcoming Disruptions Via E-Commerce
Yojoa Trading Company, one of the services that offered a lifeline to JJ-Agro, also received support from the TMS Activity when they launched their online sales platform a month ago. The company began using the electronic payment platform of another TMS Activity partner, Sube Latinoamérica. Sube Latinoamérica provides an integrated e-commerce solution for small- and medium-sized businesses. To help businesses learn how to transact online, Sube Latinoamérica provides webinars, workshops, access to logistics carriers nationwide, and ongoing consultation services as part of its service offer.
KEY TAKEAWAY 3: Honduran businesses selling online cope better with the COVID-19 crisis. An estimated 19.5 percent of businesses surveyed are changing their business models to sell products and services online.
Thanks to online sales and new home delivery services, Yojoa Trading Company experienced rapid growth in just 10 days. The company can now sell and deliver fresh produce directly to consumers, bypassing intermediaries, such as grocery stores, while still offering fair prices and reducing food insecurity in the two largest Honduran cities. Given the observed success of these new and improved distribution models, other businesses, such as Pyflor, are also considering expansion into new e-commerce channels through Sube Latinoamérica.
KEY TAKEAWAY 4: Commerce enterprises in Honduras, especially those using online selling platforms, are more resilient to the COVID-19 crisis.
Transforming Business Models
This story is more than anecdotal; it represents the type and profile of businesses that are statistically coping better with the negative impacts of COVID-19. More than half of the businesses surveyed are proactively changing to their business models to adapt to the COVID-19 situation. They are building their resilience capacities by taking sales online, diversifying their products and services, and implementing strategies to operate in a post-COVID19 reality. As a result, these enterprises are losing fewer sales and laying off fewer staff.
The TMS Activity is paving the way for these businesses by applying our systemic, market-based approaches to reduce the barriers they face in adopting e-commerce solutions. We are facilitating new patterns of supply chain distribution and supporting businesses as they test and validate new products, services, and business models so that these outliers may become the new norm.
Honduras, like most countries, will face uncertainty and difficulty in the months and years ahead. But, with support from the TMS Activity and its market systems approach to building business resiliency, many Honduran enterprises will weather the storm and be prepared to hit the ground running when the clouds roll away.
Access the USAID/Honduras TMS Activity's COVID-19 Business Resilience Analysis via the link below.
By Hayden Aaronson and Mark Sevier, ACDI/VOCA
In this blog Hayden and Mark provide some very useful guidance for projects as they support market systems in their response to covid-19. While the advice does provide effective guidance to common emergent challenges, it is also useful to integrate good systems thinking. Maybe, most importantly, is to maintain an understanding that while covid-19 is a shock that is very problematic, it is also a disrupting force that could be harnessed to catalyze systemic change. As a result, it is important to think about how could any response do both address an immediate need, and catalyze/amplify a systemic change process. For example, as stated in the second strategy it is critical to improve the connectivity between government and the private sector, but it is also important to integrate into such efforts thinking on how the government and private sector should cooperate more effectively coming out of and beyond the covid-19 shock. Additionally, when engaging a market actor to help shift channels, it will be critical to also think about how support to that firm (as opposed to other firms) may have a greater effect on the competitive landscape during covid-19. Firms that come out of this shock in good financial shape will have a substantial competitive advantage giving them lots of influencing power. As a result, having a sense of how the competitive landscape could be improved coming out of covid-19 would be important when designing interventions to immediate weather this storm. From a systemic resilience perspective, it is important to consider both the immediate need to weather the storm, and the capacity of the system to identify, prioritize, and allocate resources in ways that more effectively neutralize and mitigate risks before they have to be absorbed.
COVID-19 is challenging the world to adapt, and, in doing so, causing two major problems in our food and agricultural systems:
1. Agricultural productivity and demand are shifting quickly and simultaneously. People are buying less because of lost jobs and lockdowns. Supply is also being disrupted by bottlenecks, closed marketplaces, and a lack of services, such as mechanization and transport. The result is unstable food prices, less access to nutritious food, lower incomes, and less long-term profitability.
2. Many consumers have poor access to health information and products. Amid this breakdown in connectivity, they face exploitation, a loss of trust, and potential health risks.
How do we fix these two seemingly disastrous problems? By adapting. At ACDI/VOCA, our inclusive market systems approach has always aimed to take on big, systemic problems and find ways to make markets work better for poor and marginalized people. Now, that approach is shifting to support the recovery of people and businesses affected by COVID-19.
1. Assess the Impact Of COVID-19
The first step many of our programs took was assessing the potential damage. For example, the USAID/Honduras Transforming Market Systems (TMS) Activity surveyed 1,178 enterprises from 16 of Honduras’s 18 departments and found that most businesses in Honduras will close within three months unless they receive emergency financial assistance. This data informed proposals collectively drafted by the Honduran government, National Tourism Reactivation Board, Chamber of Tourism, and National Institute of Tourism.
Other programs, like the USAID-funded Feed the Future Kenya Livestock Market Systems Activity, are supporting local partners, such as the Turkana Chamber of Commerce, to survey businesses and collect data of their own.
2. Collaborate with Governments on Recovery Policies
Rapid assessments can inform governments as they consider policies supporting COVID-19 recovery, like in Honduras, where the program’s assessment informed the government’s decision to pay employees suspended from their tourism-related jobs a monthly salary for six months.
In Bangladesh, the USAID-funded Feed the Future Bangladesh Rice and Diversified Crops (RDC) Activity team is working with the private sector to report bottlenecks in supply chains to policymakers. The team is also coaching businesses to lobby for the lifting of import restrictions on certain agricultural inputs and permits to allow them to transport inputs and commodities into areas under lockdown — both of which will help stabilize prices and markets.
3. Offer Financial and Technical Assistance
Many local enterprises will require grants to get back on their feet. But many will also need technical assistance to become resistant to ongoing shocks. The Feed the Future Ghana Agricultural Development and Value Chain Enhancement II Project, funded by USAID, is strengthening networks of outgrower businesses to organize the supply of inputs, such as fertilizers, and procurement of commodities.
4. Digitize Business Models
As people adapt to a socially distanced world, many businesses will rely on new distribution channels. In Bangladesh, the Feed the Future Bangladesh Livestock Production for Improved Nutrition Activity expanded the Android app Shurokkha, developed by its partner mPower Social Enterprises, to provide remote veterinary services to local livestock service providers.
The same program in Honduras is also helping enterprises diversify their distribution channels and move toward e-commerce.
5. Ease the Flow of Information through Existing Networks
Businesses have a moral and financial incentive to protect consumers’ health. To ensure consumers have access to health information and products, existing partnerships, supply chain infrastructures, and other pathways should be leveraged.
In Burkina Faso, a worsening security situation meant that the Victory against Malnutrition Plus (ViMPlus) Activity, funded by USAID’s Office of Food for Peace, already had a system for disseminating audio recordings in local languages to communes via telephone or mobile devices.
In Colombia, the USAID-funded Emergency Response in Arauca II Program is providing advice over the telephone about family protection and access to care, such as emergency aid programs implemented by the government and other agencies.
In Tanzania, the Feed the Future Tanzania Nafaka II Activity team is providing tablets preloaded with training materials on good agricultural practices to more than 50 of its most active and engaged participants.
Looking Toward the Future
COVID-19 has created a resilience stress test for food and market systems around the world. While the focus in many countries is still on the outbreak itself, market systems approaches that leverage business resources and incentives will aid the economic recovery phase that is sure to follow.
Hayden Aaronson is a senior technical director of market systems at ACDI/VOCA, where he leads the technical design of programs and supports Collaborating, Learning, and Adapting (CLA) strategies. He is a former chief of party in field offices and has worked in many technical areas, from economic development in the Balkans to post-conflict recovery in Northern Uganda.
The MSDHub Blog Series is authored by respected implementers and donors of market systems projects globally.