Social Capitalists: Root Capital
William Foote, CEO
Throughout the developing world, rural villagers and subsistence farmers struggle to scratch out a living in and around sensitive landscapes and ecosystems. They often pursue short-term moneymaking strategies, such as slash-and-burn agriculture, clear-cutting native forests, and intensive livestock grazing. These practices irreparably damage both the natural environment where they live and threaten their longer-term economic prospects.
Root Capital is a social investment fund that addresses these inter-related challenges by providing affordable credit and financial education to grassroots businesses in the developing world. Launched in 2000, its mission is to fight rural poverty and conserve natural resources by supporting businesses that foster environmental stewardship and increase income and market access for the rural poor, who account for 70% of the 2.7 billion people living on less than $2 a day. Root Capital targets enterprises where smallholder producers have organized themselves into businesses, which have selling power and thus the ability to fetch better prices for quality as well as Fair Trade and organic certifications. To date, Root Capital has provided over $70 million in loans to more than 160 rural enterprises across 26 countries in Latin America, Africa and Asia. Over ninety-nine percent of its loans have been repaid.
Thanks to the rapidly growing world market in "green" food products such as shade grown and organic coffee and cocoa, disadvantaged farming communities are rediscovering the wisdom of "sustainable" crops. Yet in order to serve these consumer markets, producer groups must have capital to grow their businesses and invest in processing equipment. Banks have historically ignored the rural poor because of perceived risks and insufficient collateral.
Root Capital's lending model addresses the critical finance gap confronting rural businesses such as farmer, artisan and fishing cooperatives, which are too big for microfinance (e.g., $500 loan to a street vendor) and considered too small, risky, and remote to attract investment from commercial financial institutions. Preference is given to businesses that demonstrate the ability to increase household income for marginalized groups (e.g., women, indigenous people, family farmers); are located in and around protected habitats; offer local self-determination through worker-owned and -managed enterprises; and are unable to secure commercial financing sources.
Root Capital is able to manage risk while serving these clients by using future sales contracts from companies like Starbucks, Green Mountain Coffee Roasters, and Whole Foods as the main security. By moving beyond traditional approaches to collateral, this strategy redefines risk in rural finance in a way that places value on ethical, sustainable, and certified products and supply chain relationships. Furthermore, by linking producers to capital and supply chains, Root Capital facilitates access to global markets for remote communities, which enables small producers to increase their household incomes and build their assets. It also helps its grassroots business clients develop the skills, track records, and relationships required to commercialize high-value products and, over time, become "bankable" customers of mainstream financial institutions. Root Capital's successful track record demonstrates that it is simultaneously possible to stimulate economic growth, social development and environmental stewardship in the developing world.
In addition to its core lending activities, Root Capital addresses the critical need for basic business training and financial education among grassroots businesses in its target regions. This financial education program complements and deepens the impact of Root Capital's core lending activities by equipping leaders of farmer and artisan cooperatives with financial and managerial skills to build their businesses and work effectively with suppliers, clients, and commercial financial institutions. Launched in Mexico and Central America in 2006, the financial education program will be replicated in South America and Africa beginning in 2008.