The middle. It’s a tough place to be, especially if you are a business owner in the developing world too large to apply for microcredit (typically loans of $25-$50,000) but still too small to apply for a typical bank loan (typically 200,000 plus). These businesses are in the “missing middle”, a finance bubble that prevents them from leveraging their size for credit. Without this credit, businesses in the developing world that are successful, but not necessarily booming, can’t access the funds that they need to grow and sustain their operations.
I recently visited the offices of Root Capital, a non-profit that provides loans to businesses in the developing world in the “missing middle”, typically agricultural cooperatives that grow coffee and cacao. Their front lobby is an enticing tiered display of mouthwatering chocolate, different types of skin care creams, handmade crafts, and aromatic coffee—all products from Root Capital’s portfolio of investments. Many of the packages are from well-known brands like Starbucks and Whole Foods, while other are from up-and-coming consumer favorites like Taza chocolate.
“One of the major barriers to people moving outside of poverty and having more prosperous livelihoods is access to finance,” says Jesse Last, Root Capital’s Strategy and Innovation Associate. Since its launch, Root Capital has provided more than $256 million in credit to 320 small and growing businesses in 30 countries in Latin America and Africa with a 99% repayment rate from borrowers and a 100% repayment rate to investors.
“Farmers might be growing a terrific crop like coffee and there may be demand for the crop, but if they don’t have money to buy up all that coffee, process it, and export it to the end buyer, than they can become trapped,” explains Last. In other words, farmers in the developing world may harvest a profitable crop but are forced to sell it at bargain prices to middle-men, who may not offer the best price but have cash in hand, in order to pay their immediate expenses.
Removing the obstacles to starting and expanding businesses in rural agriculture will be a crucial step in attaining the first millennium development goal, eradicating extreme poverty and hunger. Seventy percent of the world's poor live in rural areas. Agriculture is the main source of income and employment, and in the oncoming years has the potential to reduce rural poverty by more than twice the amount of any other investment sector. Non-farm activities provide 44 percent of rural jobs in Asia and 25 percent in Latin America. In rural India they provide 60 percent of the income of the poorest 20 percent of the rural population.
Take cacao farmers in Peru. Peru is the world's second largest cocaine producer after Colombia, with nearly 139,000 acres (56,250 hectares) covered by the crop, according to the UNODC. Farmers grow coca due to intimidation from drug traffickers, but also as the surest way to pull themselves out of poverty.
That’s changing, though. Over the past few years with loans from organization like Root Capital, assistance from aid agencies working with local groups, and access to global markets, farmers are turning to cacao as a safe and profitable crop. Cacao exports for chocolate production were up over 400% in the past decade, and production this year will be around 35,000 metric tons, putting Peru close to the top 10 biggest producers.
Last recalls speaking with farmers from a cooperative in the St. Martin region of Peru, one of Root Capital’s first loans. “The farmers told me, ‘we aren’t known anymore as coca growers, we are known as cacao growers and we want the world to know” says Last.