Small money, big change. That, in essence, is what William Foote was banking on when he ditched Harvard Business School to start what is now Root Capital, a "nonprofit social investment fund" that lends to small and medium rural businesses in developing countries.
Root Capital's business model is to go where other banks will not —the agricultural sector of poor countries —and loan rural businesses as much as $500,000 to expand or improve their operations. The strategy is posting enviable numbers: Borrowers repaid 99% of the $300 million lent to them across Latin America and Africa since 2000 (investors reportedly enjoyed a 100% repayment rate).
But it's not all about the money. Root Capital focuses on "environmental and social returns" and reports reaching more than 450,00 families through its investments in hundreds of businesses. With fixed returns averaging 2.5% over the last decade, however, its financial products have outperformed many of the financial disasters sold on Wall Street during the last decade.
Foote's insight was that the world's 3 billion rural poor with little or no access to formal finance, even micro-finance institutions, could benefit from the right lender who would unleash their profit potential. A visit to developing countries offers ample evidence for the tragedy of the market failure: A deadly combination of government neglect of education, roads, regulation and commercial infrastructure, and private sector aversion to "risky" enterprises like agriculture, condemns billions to poverty of less than $2 per day.
Root Capital has made this neglect into an investment opportunity by targeting "sustainable agriculture and fisheries, wild-harvested products, certified wood and ecotourism." It is rapidly expanding into commodities like coffee and cocoa for export to markets in Europe and North America, and promoting African food security by backing companies selling higher-yielding and drought-resistant seeds and enterprises processing nutritious foods for local markets.
Although returns don't rival those of hot industrial sectors yet, financial innovation in rural areas is accelerating. New lending institutions, crop and weather insurance as well as innovative supply-chain relationships are bubbling up as globalization arrives in the remote regions of the developing world. Even the World Bank, an avid financier of massive infrastructure and industrial projects, has warmed to the idea that investing in rural projects reaching the vast, rural and invariably poor heart of developing countries is often a better way to reduce poverty than (just) pouring more concrete or building power stations. Its World Development Report in 2008 estimates economic growth in the agricultural sectors of Latin America and China was 2.7 to 3.5 times more effective in reducing poverty than growth originating outside the sector.
So should Root Capital—or organizations like it—be your next investment? Maybe you should consider dropping those safe Treasury Bonds for something really secure: an investment in the latest agricultural projects of northern Uganda, Rwanda, or Liberia.
[Image: Flickr user Find Your Feet]