Saemaul Impact Fund

Around 46% of rural populations in Latin America are entrapped in poverty due to barriers to formal financial services. Many of these do not have a proper credit history, and financial institutions require upfront collaterals and an average of 36% of the interest rate. 

The Saemaul Impact Fund (SIF) is a financial inclusion model for community-driven agribusiness projects to tackle the rural poverty in Colombia. The SIF empowers rural communities to identify community-led agribusiness project opportunities and make project proposals. Then, the SIF provides small scale project financing, ranging from $10,000 to $100,000 to rural community organizations that are committed to sharing their liabilities as a group. With this loan, rural communities can acquire productivity assets to improve income throughout the agribusiness projects developed by themselves. Lastly, the SIF supports to create community-owned funds upon the completion of repayment, by paying back 5% of the loan principal to the communities.

According to ILO, as of 2016, rural poverty in Latin America registered at 46.2%, while urban poverty is marked at 23.8%. In Colombia, the rural poverty rate was registered at 40.3%, accounting for 3.8 million people. These people do not have access to formal financial services. 

Currently, there are more than 40 microfinance institutions (MFIs) in Colombia, but the average interest rate is at 36.4% EAR (Effective Annual Rate), ranging from 17% to 41.8%, and most of them require upfront collaterals. These lending conditions still have been barriers to access financial services, and those who cannot provide collaterals have to borrow money from informal lenders, such as usurers.

Even though rural households can access to microcredit, the average microcredit amount at $1,160 does not seem to make a significant impact on improving their livelihoods.

The Saemaul Impact Fund (SIF) intends to fill the gap between the financial needs of underserved rural communities and the barriers to access formal financial services in Colombia. By combining the project finance concept and Korea’s rural development movement, Saemaul Undong, it became a hybrid model of impact investing and community-led agribusiness project vehicle. The SIF provides project financing ranging from $10,000 to $100,000, which is considered as ‘missing middle’ for income increasing projects driven by rural communities while developing local leadership and supporting to create community development fund owned by the rural communities.

The SIF targets rural community organizations or groups that have clear ideas to scale their agribusinesses through investments in rural productivity assets but do not have access to appropriate financial services to fulfill their financial needs. These people should have strong social ties, collaborate as a group, and committed to share the liability. The SIF prioritizes women’s associations, refugees from Venezuela, and internally displaced groups due to the armed conflict. 

The first pilot customer will be La Vuelta community in the Municipality of Tibacuy, Cundinamarca, Colombia. The community consists of around 60 households, mostly dedicating to coffee production. Some of them involve in plantain and honey production, and a few dedicate to cattle raising. The community produces 8-9 tons of coffee beans annually, but among the total coffee bean production, they sell both wet and dried coffee beans in a proportion of 50 to 50. The price of the wet coffee beans to the local intermediary is at 40% of the dried coffee bean price. If the coffee producers can use a coffee peeling machine and a coffee bean drying machine with a higher capacity to sell 100% of dried coffee beans, 43% of income increase can be achieved. 

Rural households do not have access to investment capital from formal financial institutions because they do not have credit history and are not affordable to provide upfront collaterals and to pay high interest rates.

The SIF pools rural households' investment needs and provides accessible project financing loans based on their commitments to share the liability and to work together as a group for the agribusiness projects developed by themselves.

In this way, rural households will expect an income increase from their investment while building the capability to escape from the poverty trap.

Currently, there are no direct competitors of the SIF in the market. Microfinance institutions (MFIs) in Colombia, such as Fund de la Mujer, Banco WWB, Interactuar, Fomentamos, provide average $1,160 of microcredits upon sound credit history, upfront collaterals, and average 36% of Effective Annual Rate (EAR). In some extreme cases, the interest rate reaches 43% EAR. Many rural populations do not have a credit history or have damaged credit history due to prior third-party guarantor role for their friends or relatives.

Here comes the innovation. The SIF provides loans ranging from $10,000 to $100,000 to enable the smallholder farmers to purchase technology-based productivity assets, which are unaffordable for an individual smallholder farmer to acquire. By pooling more than ten smallholder farmers living in the same rural community and sharing their liabilities as a group, the SIF can provide them with financial accessibility to this scale of amount. 

Additionally, the SIF does not require the customers upfront collaterals, which are generally not possible for smallholder farmers to provide. Instead, the SIF will take the invested productivity assets as collateral. When the repayment is complete, the customer organizations will own 100% of the assets. 

The last part of the innovation is the SIF aims to create community-owned development funds. Once the repayment is complete, the SIF will pay back 5% of the principal amount to the customer organizations. The rural communities will directly manage this fund to invest any kind of community projects.

Technologies involved with the SIF are comprehensive. The SIF seeks to invest in technology-based rural productivity assets that enable rural community organizations to add value to their agricultural goods, improve productivity, or reduce the cost of production. These include coffee bean drying machine, cacao peeler machine, solar-powered water pump for irrigation, rice combine harvester, greenhouse, etc.

In the future, when the customer base becomes bigger, Data Analytics based on alternative data, such as mobile phone and utility bill payments, education level, geographical factors will be deployed during the Know Your Customer (KYC) process to screen out community organizations or members with high default risk.

The solution involves two main inputs. The first input is community capacity building, and the second one is offering of project finance. The community capacity building includes introductory seminar of the SIF, basic training on the Saemaul Undong concept, and workshops on business planning and project proposal development. The project financing is the outcome of the first input. As a result of seminar, training, and workshop, rural communities will develop a project proposal and submit to the SIF. Then, the SIF will appraise the project proposal and approve the funding when the project looks viable to achieve the expected impact. The second input is project financing, which rural community organizations can invest in agricultural productivity assets, such as coffee processing machines to add values, solar-powered water pumps for irrigation to improve productivity, rice combine harvester to reduce the labor costs. 

The outputs will be rural productivity assets and the commitment for collaboration among the community members. These outputs will enable the community organizations to work more effectively to add values, improve productivity, or reduce the labor cost. As a result, improvement in income level can be achieved as an outcome. The improved income will make the participant households affordable to repay the loan principal and interest in a monthly basis. Considering the seasonality of the harvest, the SIF provides a grace period of up to six months. 

Once the community organizations repay all the principal and interests, they will have 100% ownership of the invested assets, and 5% of the principal will be paid back to the community organizations to create a sustainable community development fund, which can be used for any other community projects they want to implement at their own will. In this way, the SIF expects the target customers to get out of the poverty trap, making use of the agricultural productivity assets, improved local leadership, and the newly created community development fund. This is the expected impact of the SIF. The more rural communities the SIF reaches, the more chances for underserved rural populations to escape from the poverty are expected.

At the current stage, the SIF does not serve any customers yet but plans to serve 1,440 households covering 48community organizations in the first year. In five years, the SIF plans to serve 36,720 households throughout 1,224community organizations. Considering that one household consists of five family members, the total number of beneficiaries will reach 183,600 people in five years.

The SIF will conduct primary research in La Vuelta community of the Municipality of Tibacuy, Cundinamarca, Colombia, to validate hypotheses, develop a complete business case, and understand the supply chains of different agricultural products in the region and key machinery suppliers. With the pre-seed money, the SIF expects to expand the team, recruiting a Chief Investment Officer (CIO) and one local loan advisor. The SIF also plant to develop a Minimum Viable Product (MVP), set up a local office and run a pilot targeted for La Vuelta community.

Within the next five years, the SIF will raise Seed round capital to start its official operations in Colombia, recruiting Chief Financial Officer (CFO), Chief Marketing Officer (CMO), HR manager, and up to 10 loan advisors to scale the sales, adding two loan advisors every year to cover different regions within the country.

The key financial barrier is to access pre-seed and seed capital to found a team and launch the venture. On-time capitalization is fundamental to run a pilot and start the official operations in Colombia.

Regarding the technological barrier, machine learning technology needs to be implemented in the long-term for the KYC process to screen out high-risk organizations and individuals. Additionally, Internet access for submitting online project proposal might not be available in many rural communities.

In terms of market barrier, the geographical dispersion of target communities may increase the Customer Acquisition Cost (CAC) and reduce efficiency to scale.

The mitigation plan for the financial barrier includes:

• Prepare for funding applications through different funder groups, such as Korean ODA agencies, MIT network, and Social Venture Accelerators.
• Korean ODA agencies include Korea Saemaul Undong Center and Korea International Cooperation Agency (KOICA)
• MIT network includes PKG IDEA Social Challenge and D-Lab. 
• Social Venture Accelerators include Techstars Foundation, Y-Combinator Non-Profit Program or Village Capital.

The mitigation plan for the technological barriers includes:

• Recruit a data scientist who has experience of due diligence using alternative data in a Fintech startup. 
•  Accept manual project proposals parallelly for communities without internet access.  

The mitigation plan for the market barriers includes:

• Identify potential customer communities, partnering with local governments, NGOs, and universities. 
• Hold initial seminars at local government buildings, pooling different communities geographically dispersed.

The founder & CEO has 6+ years of product marketing experience for the Latin American market at LG Electronics and OTIS. He also developed his expertise in project identification, design, appraisal, monitoring & evaluation for 15+ development projects in agriculture and rural development, education, off-grid electrification, public security, public health sectors, while serving as a diplomat at Korean Embassies in Uruguay, Colombia, and Honduras during last nine years.

He majored both in Spanish and Business Administration at Hankuk University of Foreign Studies, South Korea, and holds an MSc in Management and Implementation of Development Projects at The University of Manchester, the UK, and recently completed an MBA program focusing on impact investing, social innovation, and entrepreneurship at MIT Sloan School of Management in May 2020.

The SIF plans to partner with the Colombian Ministry of Agriculture and Rural Development, Rural and Agricultura Planning Unit (UPRA), Municipality of Tibacuy and other local governments, Plan International Colombia, and Science and Social Innovation Park of UNIMINUTO. These partners are expected to support the SIF to identify priority candidate communities in the early stage of the operations in Colombia, understand agricultural landscape and value chains, as well as to outreach other candidate communities nationwide.

• Colombian Ministry of Agriculture and Rural Development: supports to the SIF to identify priority candidate States and Municipalities.
• Rural and Agricultura Planning Unit (UPRA): supports the SIF to identify agribusiness landscape across the country and to understand the agricultural value chains.
• Municipality of Tibacuy and other local governments: supports the SIF to identify priority candidate communities within the Municipality.
• Plan International Colombia: supports the SIF to identify vulnerable communities across the country
• Science and Social Innovation Park of UNIMINUTO: supports candidate communities to structure projects, and conduct monitoring and evaluation of approved projects.

The business model is described based on the following components:

• Key Resources: Grant capital from Korean ODA agencies and MIT network, Fund capital from Local Philanthropists, Impact-first impact investing firms, Multilateral Development Banks (IFC and IDB), local loan advisor staff
• Partners + Key Stakeholders: Central and local government entities, NGOs, and universities
• Key Activities: identify potential communities, hold introductory seminars, basic training of Saemaul Undong, and workshops for identifying projects and elaborating project proposals, conduct project appraisal, disbursement of capital, collect repayments, pay back 5% of principal upon completion of repayments.
• Type of Intervention: small-scale project loan financing (between microlending and corporate lending) 
• Channels: Community visits by loan advisors (in the short-term), online platform (in the long-term) 
• Segments: Rural communities in poverty in Colombia
• Value Proposition
  • Beneficiary: Smallholder farmers and their families, agricultural equipment suppliers, agricultural product buyers
  • Customer: Rural community organizations and groups
• Customer: Rural community organizations and groups
• Impact Measures: # of households got out of poverty line, Avg. monthly income improved, and # of community development funds created, # of income projects created by communities
• Cost Structure: Staff, Repayment Risk, Travel cost
• Surplus: Data Analytics and Machine Learning to screen out high default risk customers
• Revenue: Interest from project loans

In the early stage, the SIF will raise capital from local philanthropists, impact investors, and multilateral development banks to initiate operations. From year 3, the net income is expected to turn positive, enabling the SIF to invest the surplus for operational expansion and creation of another fund to cover other Departments. The SIF will charge 20% EAR for each project loan, and the average loan amount is assumed to be $30,000 with six months of a grace period and 30 months of the repayment period. The average target cost of capital from investors is 5%. 

A grant funding from MIT Solve is critical to conduct a market research to verify the hypotheses of this business plan and develop an MVP. This will eventually lead the SIF to be launched in early 2021.

The SIF targets to support vulnerable populations in the rural areas in Colombia. Rural populations in Colombia include 1.3 million refugees from Venezuela who do not have any credit history in Colombia and do not have access to formal financial services to support their settlement in the country. The SIF expects to support the Venezuelan refugees for their financial inclusion in addition to 7.7 million internally displaced Colombians due to the armed conflict.

The SIF can develop local leadership of different rural community organizations. In Latin America, women's role is critical to improve the livelihoods in the rural context. The SIF aims to include women to lead the community organizations and groups to develop the local leadership of women, thereby ensuring the income increase, loan repayment, and wise use of community development funds created by the completion of the loan repayment.