New funding for microenterprises and SMEs

Micro finance could help marginalized groups in Sweden get back on their feet after the crisis.

Already before COVID-19, youth unemployment was high in Sweden, and large parts of the potential workforce was entirely dependent on social benefits. Better access to new forms of funding for microenterprises and SMEs, would be particularly helpful for these groups. The crisis will make the situation worse, but will it also be an opportunity to turn the development around? 

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Pontus EngströmSofia AltafiGabriel Karlberg, and Sophie Nachemson-Ekvall

COVID-19 makes the struggle for jobs worse 

The ongoing COVID-19 pandemic has far-reaching consequences for entrepreneurship and the ability of people to generate an income. Even before the pandemic, the struggle and competition for jobs in Europe as well as in Sweden was intensifying and inequality along with segregation was on the rise. Especially vulnerable and marginalized groups on the labor market include refugees and migrants but also youth. In Sweden, over 13% of the potential workforce lived entirely on social benefits before the COVID-19 outbreak. The Swedish welfare model, which is built on the idea of high involvement and high degree of employment in the population, is currently seeing Europe‘s highest employment gap between domestic born and foreign born. Youth unemployment in Sweden was 20% in 2019, which compares to 11% in Denmark and 10% in Norway. In a Swedish context, where large groups are excluded from the labor market, the entire basis of social capital will risk start eroding, leading to a society of mistrust and alienation.  

The Swedish model has historically been built on the idea of large corporations and strong unions working together in one of the world’s tightest corporative arrangements, while microenterprises in particular but also SMEs have to a large extent been neglected by both the traditional market actors and the policy makers. From a historical and development perspective the uneven focus is understandable, but often pointed out as a risk factor by economists. In a global context, Sweden has been a leading force in both international aid and environmental matters, not the least through climate activist Greta Thunberg. While Sweden has internationally had a strong ambition of fulfilling the 17 UN Sustainable Development Goals (SDGs), through governmental agencies like Swedish International Development Cooperation Agency (Sida), the same focus cannot be said to have been the case domestically. 

The tendency of neglecting deteriorating social issues in society is a sign of declining social capital, but the COVID-19 outbreak puts social capital back on everyone’s agenda. Rightly handled, a number of different policy instruments could be introduced to deal with the crisis and simultaneously be canalized into new initiatives designed to strengthen social cohesion.  

The welfare offering, streamlined to suit the classical Swedish labor market model, proved ill-adapted to cope with the multi-faceted needs from a new generation of non-European migrants. The COVID-19 outbreak poses new challenges to the quality of the general quality of the welfare service, which in Sweden is highly dependent on personal income tax. With an expected increase in the unemployment rate, fewer taxpayers will need to bear a larger share of the burden. Businesses of all sizes are being affected. With a shrinking global market, and the need for a stronger domestic focus, the need for a conducive environment for small and medium-sized enterprises (SMEs) and microenterprises is high.  

We lay out the foundation for a more inclusive financing of microenterprises and SMEs. It should not only be easier for SMEs to hire more people, but they should also be encouraged to activate the large already existing vulnerable segment of the population who even before the COVID-19 outbreak were excluded from formal job opportunities. We propose a combination of policy instruments, specifically the introduction of a new microfinance initiative, backed by government guarantees, in combination with business training and an active support from actors across society, including civil society and other hybrid organizations. 

Accelerating unemployment of foreign born, especially women 

A recent report by the Swedish Entrepreneurship Forum3 indicates that as many as 772 000 individuals, or 13.3% of the Swedish work force, were living completely on social benefits. Recent research shows that it takes 12-13 years for 50% of the group defined as foreign-born to obtain a subsistence level in Sweden. While the unemployment rate was 3.8% in the whole population, a staggering 15.8% rate is reported for the foreign-born segment – with women in particular being left out. Thus, Sweden becomes the country with the highest employment gap between foreign and domestic born in all of Europe. In addition, the Swedish youth unemployment rate – at 21% in 2020 and increasing, remains at the higher end of the countries. 

The proportion of the population born in a non-European country and either registered as unemployed with the Swedish employment service or active in public-sponsored support programs has increased from 10% in the early 2000s to over 50%. While economists have pointed out this development for years, it may be that the COVID-19 pandemic now creates the necessary catalyst for change. A number of supportive packages have been presented as a way to mitigate the economic consequences of the crisis, including loans and credit guarantees to the commercial sector, the export industries as well as family firms. Different unemployment benefit-programs have been generously implemented, also aimed at citizens without full-time employment.  

Although the very large and mostly export-oriented corporations still constitute a significant force in society as they account for 40% of the total sales and value added, two thirds of employees in the private sector, about 3.5 million people, work in microenterprises or SMEs. With many expected layoffs, increased global protectionism and lessened dependence on global growth as a result of the COVID-19 crisis, in Sweden we will see an increased reliance on jobs dependent on the domestic market. This challenges the Swedish corporatist model on the labor market in two ways. Firstly, traditional layoffs of full-time workers and the retraining and re-employment in new and growing export industries is less likely to be successful. Secondly, both the private and public segments of the infrastructure in Sweden are catering to large and export-oriented corporations, leaving microenterprises and SMEs in a comparatively disadvantaged situation. 

The COVID-19 pandemic is unprecedented in modern times, and the only thing with which we can compare it would be a natural disaster. According to estimates from the United States (Federal Emergency Management Agency), only 60% of companies survive a natural disaster, and an additional 25% disappear within the first year after the disaster. Even more gloomy statistics are reported by the United States Small Business Administration who found that over 90% of companies fail within two years of being struck by a disaster. If applied to Sweden, the consequences of the pandemic in Sweden may be the collapse of hundreds of thousands of SMEs and the subsequent mass loss of both jobs and incomes. The strain on the general welfare offering will be unprecedented, as social benefits to unemployed and marginalized groups spiral, while the public income tax, the main source for welfare financing, drops.  

One especially exposed and vulnerable group of small-scale business owners are those with foreign backgrounds. When it comes to accessing financial services such as loans, credits or external equity (needed to grow their businesses), they were lagging behind well before the COVID-19 outbreak. This applies in particular to foreign-born women who tend to rely more on public support or loans from family members and less on traditional bank loans, according to a report from The Swedish Agency for Economic and Regional Growth. This is at least partly to blame on the too stiff financial market regulations which the banks have to follow. Microfinance institutions in developing countries instead operate with specifically designed and adapted microfinance regulations. Just like in developing countries, this particular group of entrepreneurs typically only have limited collateral in Sweden as well, like different forms of self-owned property that can be used as collateral. They also lack a prior track record with a bank. Their new networks are also often limited and discrimination can not be ruled out. Perhaps unexpectedly, research and experience from other countries as well as indications from state-owned venture capital agency Almi suggest that the credit worthiness of these types of businesses actually is good.  

A foundation in social capital and microfinance 

Social capital theory, in the version originating from the American political scientist Robert Putnam in the 1990s, is conceived as the common value of not only public tangible property but also the human capital in society, building on inter personal relationships, shared norms, cooperation, trust, and reciprocity. A society with increasing segregation and inequality where large groups feel marginalized and excluded leads to weaker social capital and mistrust. In his study of the vibrant business life in the cohesive northern Italian communities, as compared to southern depressed and conflict-ridden ones, Putnam argued that it was the high presence of social capital that accounted for the success of the former. 

Examples of new initiatives addressing the value of social capital in society can be found in our common efforts envisioned as part of the 17 UN SDGs. Domestic financial institutions, both banks and institutional investors, are increasingly adapting to the SDG expectations. As yet the focus has been mostly on supporting green financing where Sweden has taken a global lead. The banks have developed offerings for green credits and loans, as well as the issuance of green bonds on the capital market. The four large banks in Sweden (Nordea, Handelsbanken, Swedbank and SEB) are signatories of the United Nations Environment Program (UNEP) finance initiative, “Principles for Responsible Banking”. A number of European banks are already developing programs for domestic social impact credits, guarantee programs and loans. SEB hosts a number of microfinance funds, all targeting developing microfirms in developing countries. Swedish banks that wish to score on sustainability metrics could thus develop similar offerings for the domestic Swedish market.  

New instruments, such as microfinancing and guarantee-backed loans to entrepreneurs, are potentially of high interest also to domestic institutional investors as part of their sustainability policy. For example, Swedish institutions have as part of their bond portfolio invested in Spanish and French sustainability bonds that address financing to SMEs and microfirms in depressed regions. Others have supported the World Banks’s COVID-19 programs targeting SMEs in developing countries. These and previous programs include loans to financial institutions offering microcredits. Swedish investors may be persuaded to focus to a larger extent on the socially labelled UN sustainable development goals in Sweden and not only abroad. Over the past 20 years, Swedish institutional investors have invested in 20 different socially labeled bond issues, of which only two target Sweden. Socially labeled bonds are bonds where the use of proceeds is earmarked for social or green projects.  

Besides the provision of financial services to unemployed or low-income individuals who do not have access to mainstream banking services, microfinance also involves other components such as business training and insurance. Through small loans, microcredits with subsidized interest rates, and business training, the 2006 Nobel laureate Professor Muhammad Yunus and the Grameen Bank laid the foundation of the microfinance industry starting in the early 1970s. Yunus argued that the lack of financial services and the excessive capital costs for the poor led to diminished entrepreneurial opportunities. He showed that this group of individuals were both creditworthy and able to improve their lives when mobilizing and receiving credit and training.  

While microfinance in a developing country context has had limited effects on business growth, microfinance does provide a form of social insurance and extra income in societies lacking a welfare system. In addition, the effects can be measured in more dimensions than creditworthiness, such as increased empowerment and self-esteem. 

In a Swedish welfare context on the contrary, the use of microfinance implies changes to the welfare system, which currently builds on the assumption that individuals outside of the labor market are only temporarily unemployed. In for instance France, the NGO Adie has developed a practice to support the vulnerable traveler population with microcredits to support their microenterprises and register their informal business activities, supporting 19 000 microbusiness and creating 15 000 new jobs in 2019 alone. Here the French government and other government institutions provided vital support, including start-up subsidies and other support, in order to build the necessary strategic alliances between institutions in society such as the employment office and chamber of commerce, who with varying but overlapping social missions helped in Adie’s mission to create an arena for self-employment through microenterprises. 

Sweden has had a modest history of offering microloans; so far, SEK 500 million in lending has been made available through the state-owned Almi and the privately-owned Marginalen Bank, on the back of guarantees from the EU and administered by the European Investment Fund (EIF). The general interest in these programs from other banks has been low, even though some positive signs can be seen. During the COVID-19 pandemic the so-called Företagsakuten (“The corporate emergency program”) has been established as a government-backed guarantee program for loans to Swedish corporations. However, while the scheme has some received criticism, more than 60 banks so far have chosen to join. This is an unpreceded initiative as regards domestic and government-backed guarantees, a practice previously mostly focused on export-oriented corporations or focused on international development programs. 

A paradigm shift in society 

With increasing migration, a rich country like Sweden has seen a rise in the number of people excluded from the traditional labor market and instead forced to live on different forms of social benefits. Inequality and segregation lead to an erosion of social capital, which in turn carries huge indirect costs. With COVID-19, everything changes. Saving jobs has never been more important and the Swedish government has launched an initial rescue plan of more than SEK 300 billion (approximately EUR 28 billion), which is likely to increase significantly. COVID-19 opens up for new initiatives that can contribute to an inclusive society with increased trust and cohesion. Social capital is on the rise again. 

Engström & Oxelheim (2013) have previously introduced the possibility of using microfinance, with low interest rates, and business training, to make it easier for individuals with good ideas and dreams to become entrepreneurs or self-employed. The logic behind lower interest rates for this particular group of entrepreneurs is that the alternative cost to society is the cost of unemployment. In fact, Sweden is already an active promoter of microfinance and microenterprises internationally through for example Sida and Swedfund. Sweden can draw on the international experience to develop microfinancing also for a Swedish context. To succeed, there is a need to develop a domestic social financial infrastructure that includes the buy-in from public and private financial institutions, and civil society, that may be manifested through for instance the use of financial guarantees and social investment funds. 

Yet the scale of the two existing initiatives by the state-owned lender Almi and the private bank Marginalen Bank, approximately 3 300 microloans averaging SEK 150 000, is far from sufficient to meet the needs of the Swedish microenterprises and SMEs in general and the needs of entrepreneurs with foreign background in particular. Given the higher risks of newly started businesses, loans under the current initiatives are associated with some administrative fees as well as interest rates that are often higher than the one offered to established companies. In addition, the loans have difficulties reaching the most marginalized groups. Even though the EIF demands a smaller interest rate discount for companies in the microloan program, the annual interest rate of these loans often range between 4 and 9%. This means that small businesses most often have to deal with higher capital costs than large, established companies. Lastly, the current initiative is struggling to reach 13.3% of the workforce who could work. 

In other words, the new form of microfinance we are proposing is in a market segment where current actors are active to a limited extent, which is principally due to higher risks and somewhat larger difficulties in assessing the repayment capability, combined with low profitability when servicing the segment. This implies that there should be no competition between a governmental and the private alternatives.  

The risk and benefit assessment is fundamentally different between a private actor and a state actor. A private bank lends money to microenterprises according to its financial risk appetite, knowing that the whole portfolio of loans needs to be optimized and balanced to compensate for the fact that some of the loans will not be repaid.  

For a state owned lender, on the other hand, the whole calculation looks different with other benefits that also need to be included. Unlike the private owner, such an actor enjoys all the positive social and financial effects from supporting these businesses. The successful businesses, perhaps some even creating other jobs, will move people from unemployment to employment, contributing to higher tax revenues and reduced costs to society as a result of lower unemployment and reduced social exclusion. To conclude, the risk willingness but also the benefits for a state owned lender are different to that of a privately owned bank, and thus implies different lending rates, see graph below. 

There is already a structure in place in Sweden where the government offers loans with a subsidized interest rate, and that is to all university students, non-discriminary and not taking into consideration collateral or financial track record. Even those with a debt with the Swedish Enforcement Authority are able to obtain a loan. If a private bank lent money to these students, a much higher interest rate would be charged in addition to a request for collateral. 

The EIF has a portfolio of programs with the aim of increasing the availability of financing to microenterprises and SMEs to support growth and increase employment rates in the EU. These programs have been widely used in the EU by private, often smaller, banks. In Sweden, however, the interest has so far been relatively low. The EIF microloan guarantee instrument addresses all microenterprises but specifically aims to targets young entrepreneurs under the age of 35 years and entrepreneurs with foreign background, and there is also a focus on gender equality. Both Almi and Marginalen Bank use the program to lower the threshold since the guarantee rate of 80% reduces the need of additional securities from the entrepreneur. Therefore, personal guarantees and collaterals could be reduced to a minimum 10-20% of the total loan amount while keeping the entrepreneur still with some risk exposure. Outside the EIF program, 100% personal guarantee is the norm.  

We propose three measures to improve the current situation and truly shift the focus towards addressing large groups of currently excluded citizens. These measures combined have large potential to improve the quality of integration as well as government finances and the funding of the welfare state. In this initiative, the focus on microenterprises and SMEs is key. 

  1. Inclusive financing of marginalized groups: Microfinance as an initiative that specifically targets marginalized groups in society excluded from the mainstream financial system can be achieved through a state and private backed credit guarantee fund. Example of such funds already existing in Europe are the British Big Lottery Fund, Finnish Sitra, French CDC (Caisse des dépôts et consignations), the state-run investment bank Ppifance, and the cooperative bank Crédit coopératif. From a Swedish perspective, Allmänna arvsfonden [the Swedish Inheritance Fund], with a capital of SEK 10 billion, could receive a similar broadened mandate. The mandate of Almi could also be revamped, as well as the anachronistic mandate of the Nordic Investment Bank. We further propose the Swedish government maintains Företagsakuten after the COVID-19 pandemic, and to direct it towards microenterprises and SMEs, with a higher focus on guarantee schemes backing microfinance initiatives. 
  1. Introducing a new form of microfinance: The existing form of microloans in Sweden needs to be complemented by a completely new set of loans, governed by a separate form of microfinance regulation that allows for more favorable repayment schemes, lower administrative fees and interest rates well below commercial rates. Since the financing initiative is targeting individuals with good ideas and capabilities, but who are excluded from traditional bank financing, the risk premium on lending rates is actually negative to the state, even before taking the state guarantees into account. 
  1. Domestic technical assistance initiatives: Servicing the marginalized groups of society involves significant work. Civil society in addition to public, such as schools and universities, and private institutions can be mobilized to apply their resources and special competences through the provision of incentives to carry out training programs in collaboration with the financing institutions. Examples of such actors include a revamped Swedish Public Employment Office (Arbetsförmedlingen), NyföretagarCentrum, Drivhuset, Coompanion and Stiftelsen Ester. Offering independent support is crucial to improve successful entrepreneurship at all levels of society, not just among marginalized groups. 

Revitalizing the Swedish welfare model post COVID-19 

Prior to COVID-19, the share of the potential work force living on social benefits made up over 13%. In a Swedish welfare-state context, the marginalization of large groups from the labor market will lead to an erosion of social capital, resulting in increased levels of mistrust and alienation in society. With the COVID-19 crisis, even more individuals risk ending up in marginalization and living on social benefits.  

At the same time, the crisis may be the catalyst needed to turn the development 180 degrees. We lay out the foundation for a new model for microfinance, adapted to the Swedish welfare state, including new necessary regulation and support mechanisms, such as business training and guarantee schemes. Sweden already has, through Sida and Swedfund, vast experience and technical know-how in how to run microfinance and guarantee schemes. This will also be a good opportunity for Swedish banks to live up to UNEP’s finance initiative “Principles for Responsible Banking”. 

In order to revitalize the Swedish welfare model, to make the best use of society’s common funds, and to make many more individuals financially self-sufficient, we propose a new government-backed financing and support initiative. The initiative should be seen as a labor-market measure and an effort to include marginalized groups. This program will also have a positive effect on the general welfare budget as part of the costs of the mass-unemployment expected to follow the COVID-19 crisis is reduced. 

References

Armendáriz, B. (2009). Microfinance for self-employment activities in the European urban areas – Contrasting Crédal in Belgium and ADIE in France.  Centre Emile Bernheim, Research institute in Management Sciences. 

Engström, P., & McKelvie, A. (2017). Financial literacy, role models, and micro-enterprise performance in the informal economy. International Small Business Journal, 35(7), 855-875.

Engström, P., & Oxelheim, L. (2014, July 18). Nya grepp krävs för att främja företagande. Svenska Dagbladet, 6. http://www.svd.se/nya-grepp-kravs-for-att-framja-foretagande_3750486 

Nachemson-Ekwall (2019) A Swedish market for sustainability-related and socially labelled bonds. Institutional investors as drivers. SSE Working Paper Series in Business Administration, Stockholm School of Economics. No 2019:3. December. https://swoba.hhs.se/hastma/paper/hastma2019_003.1.pdf 

The Authors 

Pontus Engström is an affiliated researcher at the House of Innovation, Stockholm School of Economics. He is co-founder of MTI Investment AS.  

Sofia Altafi has a PhD from Stockholm School of Economics. She is President and co-founder of the Ester Foundation (Stiftelsen Ester). 

Sophie Nachemson-Ekwall is Research Fellow at the Centre for Research on Sustainable Markets (CRSM) at SIR, Stockholm School of Economics Institute for Research. 

Gabriel Karlberg has a Fil. lic. from Stockholm School of Economics. He is a business developer at Marginalen Bank and a serial entrepreneur. 

Webinarium: Finansiering av mikro- och småföretagande innan, under och efter Coronapandemin.

En grupp kvinnor diskuterar nyföretagande under ett entreprenörskapsprogram lett av stiftelsen Ester

Småföretagares svårigheter att få finansiering var redan innan corona-pandemin ett väl undersökt faktum. Andelen svenska företag som får ett banklån under det första verksamhetsåret har exempelvis minskat gradvis sedan slutet av 1990-talet. Den pågående pandemin får nu än mer långtgående konsekvenser där många mikro- och småföretag kämpar för sin överlevnad. Dessutom, andelen utrikesfödda registrerade som arbetslösa hos Arbetsförmedlingen eller var aktiva i stödprogram har ökat från drygt 10 procent i början av 2000-talet till över 50 procent, där framförallt kvinnor tenderar att hamna utanför.

Enligt en nylig rapport från Entreprenörskapsforum var år 2018, levde över 13.3% av den arbetsföra befolkningen, eller 772.000 individer helt på bidrag, vilken innebär en enorm påfrestning för välfärdssystemet. Deras rapport visar också att det tar 12-13 år innan 50% av gruppen utrikesfödda når upp i en nivå av självförsörjning, vilket definieras som gränsen mot fattigdom

Redan 2013 förde Dr Pontus Engström och Professor Lars Oxelheim fram förslag i bland annat DN och SvD om möjligheten att genom mikrofinans, med lägre ränta, underlätta för individer med goda idéer och drömmar, att bli entreprenörer eller egenanställda. Stiftelsen Ester grundades på privat initiativ för att erbjuda utrikesfödda kvinnor som står långt ifrån arbetsmarknaden en väg till egen försörjning genom företagande, bland annat genom utbildning, tillgång till nätverk och sedermera mikrolån. Statliga Almi Företagspartner och det privatägda Marginalen Bank är två aktörer som, utifrån garantier från EU genom Europeiska Investeringsfonden (EIF) har möjlighet att låna ut en halv miljard i mikrolån till svenska småföretag. Som en del av statens satsningar för att hjälpa småföretagare igenom coronakrisen har Almi fått utökade krediter och dessutom har en företagsakut med statliga kreditgarantier inrättats på 100 mdr kronor. Även EIF har satt av ytterligare 8 mdr euro för att utöka sina befintliga garantiprogram för utlåning mot småföretag.

Corona-krisen innebär stora utmaningar för samhället, men i en kris ges även möjlighet till lärande och att nya initiativ får en chans att ta form och genomföras. Paneldiskussionen handlar om vilka stödinsatser och strukturer kring finansiering för mikro- och småföretagare som finns och fungerar, men framförallt vad som saknas eller inte fungerar och bör lyftas fram för att efter coronapandemin nå ett ökat företagande, tillväxt och sysselsättning i Sverige, inte minst för gruppen utrikesfödda.

Panel: Anders Bornefalk, Harry Goldman, Emil Källström, Sophie Nachemson-Ekvall, Sara Brandt och Johan Nordström

Anders Bornefalk – Nationalekonom vid Svenskt Näringsliv med fokus på entreprenörskap, företagens finansiering och regional utveckling.

Harry Goldman – VD för NyföretagarCentrum Sverige, som finns i över 200 av landets kommuner och stöttar mellan 16 000 och 20 000 nyföretagare årligen.

Emil Källström – ekonomisk-politisk talesperson för centerpartiet, alumni från Handelshögskolan. Riksdagspolitiker sedan 2010.

Sophie Nachemson-Ekvall – forskare vid SIR & Misum vid Handelshögskolan. Flitig skribent & forskare om företagsstyrning, om sociala obligationer, samt hur banker och institutionella investera kan fokusera på FN:s sociala mål.

Sara Brandt – vice VVD i statliga Almi och ansvarig för lån och affärsutvecklingsrådgivning.

Johan Nordström – Erbjudandeansvarig lån och leasing, Marginalen Bank

Moderatorer: Pontus Engström och Gabriel Karlberg

Pontus Engström – forskare vid SIR, Handelshögskolan. Forskar främst kring finansiering och entreprenörskap i utvecklingsländer. Medgrundare av och VD i MTI Investment som skapat hundratals arbetstillfällen i Östra Afrika.

Gabriel Karlberg – Affärsutvecklare, Marginalen Bank samt lärare vid Handelshögskolan. Bakgrund som forskare inom redovisning, serieentreprenör och som konsult från McKinsey.

Medverkan i Ekots bevakning av Afrika: Borde svenska kyrkor satsat på mikrofinanser?

Jag medverkade nyligen i en diskussion rörande mikrofinans nytta i relation till de hundratals miljoner som Svenska Kyrkan och ett flertal församlingar satsat och som tyvärr gått upp i rök. Min kommentar hörs mot slutet av inlägget, de sista 4 minutrarna. Innan mitt inlägg kommenterar Mikael Färnbo rörande den granskning de gjort av kyrkans investeringar följt av ett försvar från Lars-Olof Hellgren rörande satsningarna som gjort. Min avslutande poäng är att nyttan av mikrofinans är begränsad, och varför ser man inte till hur t.ex. Sverige industrialiserades under 1800-talets slut och in på 1900-talet. Det var inte mikrofinans som skapade Sveriges storbolag utan det var medvetna satsningar på att skapa storföretag, som leddes av en kompetent ledning. Faktum är att basal utbildning, såsom att kunna läsa och skriva, var det första man satsade stort på i Sverige vid 1800-talets mitt. Frågan man bör ställa sig är alltså om inte man borde kopiera det framgångsrika receptet och pröva det istället på fler platser i världen. Tryck här för att höra inslaget från Ekots Studio 1.

More education and venture capital for developing countries

Translated from the original article in Swedish found here. A PDF version can be found here.

Microfinance funds are more popular today than ever. They attract billions from Swedish institutions and savers – even though researchers have not been able to confirm the benefits of microfinance. Swedish investors receive a high return on these investments, but the result for the poor entrepreneur ultimately becomes rather lean. Growth often fails. There are therefore reasons for politicians and decision-makers to consider whether other efforts and priorities are needed to create a more just world, where more people are given reasonable conditions to succeed.

Muhammad Yunus, founder of Grameen Bank and recipient of the 2006 Nobel Peace Prize, once compared people in poverty to a bonsai trees. He said that if a bonsai tree does not grow, the seed is not to blame – it is the soil that is insufficient. In a study that I have published with Alex McKelvie in the International Small Business Journal, we show how the soil, exemplified by poor financial literacy and lack of formal education, greatly affects microfinance’s chances of success. The often low level of education becomes the Achilles heel of microfinance itself.

Economic welfare in more developed countries is also not based on microfinance, but on the fact that talented small business owners and entrepreneurs are given better basic conditions to grow and become both nationally and internationally successful. Despite the obvious insight, efforts are often lacking in this group of companies in developing countries, although government development financiers want to focus on small and medium-sized companies.

New methods and processes are needed to enable and support private investments in smaller companies in developing countries. Today, this segment is mainly achieved through lending or grants. Loans are expensive for the small business, with interest rates exceeding 20 percent. And a loan that is not repaid can risk the company’s future. Grants require a great deal of knowledge about how applications are written. They are time-consuming, burdensome to report, associated with obligations – and difficult to obtain.

Instead, private equity is needed here, but since it is almost as demanding and costly to finance a company with a turnover of $ 100,000-200,000 as a company that has a turnover of $ 3-4 million, the investment often fails. The minimum level can be $ 3-5 million for a maximum ownership of 20-30%, which is impossible for a smaller company.

Despite the realization that education and financing of small businesses is the key to combating poverty, efforts remain modest and disproportionately distributed. The bonsai tree simply does not get the nutrition it requires.

In 2019 alone, Swedish government aid organization Sida’s aid budget is SEK 51 billion (USD 5.3 billion) for efforts to improve people’s living conditions. Of these, 5 percent go to education. To finance entrepreneurship, the sister organization Swedfund has invested a total of SEK 5 billion (USD 510 million) over 40 years, which has created 167,000 jobs. It is recommended that our politicians consider redistributing the contributions from Sida to Swedfund, and in the regulatory letter increase the investments in educational efforts.

About Pontus
Pontus Engström is an affiliated researcher at the House of Innovation, Stockholm School of Economics. He defended his PhD in 2016 and researches the informal sector and entrepreneurship in developing countries. Pontus is the co-founder of MTI Investment AS, which invests in smaller companies in East Africa. He can be reached at pontus.engstrom@hhs.se or pontus.engstrom@mti-investment.com.

On the benefit of switching towards financing SMEs rather than micro businesses

Published in Faedrelandsvennen 12 july 2018

Strømme Foundation changes its strategy from a focus on microcredit to a focus on financing small and mediums sized companies, in line with what my own research and experience indicates to be a better path towards prosperous economic development. I concur with this move and look forward to seeing the results from this change, and encourage more organizations and investors to follow this path. This is not to say that microfinance is not helping poor people. Someone said to me: “These microloans do help a little especially when it comes to women who can send their kids to school. Put a metal roof with monies earned from the small businesses they setup.” I completely agree, but by focusing on small and medium sized companies, we can help create even more jobs through scaling businesses led by competent managers. It is simply difficult to scale a small microentrepreneur with very limited personal capacity to lead a larger business. I simply suggest that there are other means which we also need to explore. Financing of SME´s has until recently been a forgotten area of focus, and more and more investors are shifting towards this group as well for more impact.

For Norwegian version, see this link: 2018-07-12_Faedrelandsvennen

For English transaltion, see this link: Strømme Foundation puts microfinance on the shelf.

The two secret ingredients needed for a great pasta sauce

Do your kids love spagetti with a pasta sauce? Well, you may have thought you made a good pasta sauce, but my friends, here is a recipe that takes the art of making a pasta sauce to another level, and reveals the simple truth of perfecting a pasta sauce.

Over the years I have been experimenting with various ingredients in the pasta sauces, and tested on my kids. In all honesty, it is because the list of things I at the moment can cook well, is short. The cooking has come with various level of success, and some complete failures. As a researcher I of course ask my self, why, what and how is this possible.

I have now successfully identified the two ingredients that make the pasta sauce move to another level, a level where you will start getting positive reviews on your cooking from your kids. Used properly these two ingredients which I am about to reveal, will make any kid or adult literally down the pasta and sauce in a few minutes, and they will go for a second round.

The nr 1 key ingredient is Tabasco. Any other spices simply do not compare to the wonders made by a few drops of Louisiana Tabasco into the sauce. The other key ingredient, not to be taken lightly, is to make sure you mix in a butter or margarine with the pasta. Here, the trick is to use a lot of it. The Tabasco gives a warmth and yumminess to the pasta sauce that makes it hard to resist and really completes the pasta sauce. The butter or margarine makes the pasta itself delicious. Also make sure to boil the pasta exactly according to the instructions, too short or too long can result in a complete disaster. Believe me. Lastly, I have noticed that the type of pasta that taste the best together with my kids is the regular spagetti.

Ingredients:

  1. Minced meat or meat substitute such as quorn
  2. Pepper and salt – modest amount
  3. Garlic – do not be a coward, use plenty
  4. One onion – the bigger the better
  5. Crushed or strained tomatoes – but not too much
  6. Red pepper (not the strong one) –  it is more for the visual effect
  7. Grated carrot – use the smaller option such that you do not really see the carrot in the sauce
  8. A few drops of Tabasco
  9. Spagetti
  10. Margarine or butter

Sure, if you have time to let it boil for a long time, that may make wonders, but I would say this can be completed in 20-30 minutes.

Other potential ingredients:

  1. Mushrooms – as replacement for the quorn or meat
  2. A little bit cream in the sauce – just a small amount

Enjoy!

Best regards,

Pontus

 

 

 

Tidningen entré skriver om min mikrofinansforskning samt MTI Investment — investerar i växande små och medelstora företag i Östra Afrika

I senaste numret av entré skriver journalisten Maria Linde om min avhandling samt om vårt jobb med MTI Investment AS – det nordiska investmentbolaget som investerar i växande små och medelstora företag i Östra Afrika.

För att ladda ner delen som har med min forskning att göra klicka här:

Pontus Engström_entre-nr-4-2016

För att ladda ner hela tidningen, klicka här:

http://www.esbri.se/pdf/entre/4_2016.pdf

The Role of Finance and Microentrepreneurship in the Informal Economy

On June 20 2016 I defended successfully my thesis at the University of Agder in Norway. Since then I am affiliated with the Stockholm School of Economics, where I do research, supervise students and teach in courses related to entrepreneurship both in the Executive MBA program and also in the Master program. I also hold a position as an Associate Professor at Hauge School of Management at NLA Høgskole in Oslo, currently teaching a bachelor course in Entrepreneurship and Innovation. My focus area is on financing of entrepreneurship. Building on the learnings from my thesis, I  founded MTI Investment AS together with my supervisor, Professor Trond Randøy, and two fellow PhDs from Tanzania, Dr. Neema Mori and Dr. Gibson Munisi. It is my firm belief, that while financing microentrepreneurs in the informal economy do help people make more money, and also stay away from criminal activity, informal societies and developing countries need more small and medium sized businesses. We seem to be fixated with this romanticized idea that all people are entrepreneurs, but if we were to go back 100 years in time and look at Norway and Sweden from a distance – would we have suggested microfinance as the solution to get people out of poverty. While it is helpful, why shy away from financing the real job creators in an economy, the small and medium-sized firms.

 

A research mention in “Vårt Land”

The Norwegian newspaper Vårt Land writes in the Monday issue (October 17, 2016 p. 8-9) about my research in an article with the title “Therefore microfinance is not that effective” (Derfor er mikrofinans lite effektivt). While my findings do find that microfinance does add extra income to an individual´s business, it also shows that size can act as a counterbalancing factor such that income actually is reduced with increased sized. The economies of scale are in other words negative in the early phase of the firm. My research also points to the fact that growth in sales or assets does not seem to be related to taking on microloans. This is not controversial. What is obvious and perhaps more relevant from my research is that the level of financial literacy among poor microentrepreneurs is VERY low, and then one should take into account that the clients I surveyed were not the poorest of the poor, but merely poor. Little research is still however done in this area, and much more is needed. There is even research pointing towards the odd fact that those with more education actually do worse. This

Little research is still however done in this area, and much more is needed. There is even research finding in some informal economies that those with more education actually do worse (Honig, 1998). This is counterintuitive, and much more research is needed here. I am currently working on a paper which looks at the role of Financial Literacy, Role Models and how these two concepts affect firm performance in the informal economy. Research in the left tail of human capital among the poorest individuals on the planet is still in its infancy, but over time we will eventually learn how to effectively lift the human capital and sustain individuals in an improved economic state. The practical example of MTI Investments, and other pioneering firms, financing small and medium-sized firms, may be leading the way in this regard, where more investments are allocated towards small and medium sized firms, rather than mostly microenterprises today.

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