Posted on April 06, 2016

Posted by: Enclude

Tomorrow morning, Enclude’s Managing Director of Capacity Solutions, Roland Pearson, will join the U.S. Ambassador to Nicaragua and representatives from Banco de América Central Nicaragua (BAC-Nicaragua) at BAC-Nicaragua’s Managua headquarters to sign a Memorandum of Understanding (MOU) to express commitment and generate public awareness for a new program working to expand access to credit to women entrepreneurs in Nicaragua. The Variable Payment Obligation (VPO) Program, which officially launched in September 2015 and is funded by USAID and the Argidius Foundation, mobilizes capital from BAC-Nicaragua and third-party impact investors to lend through BAC-Nicaragua using an innovative underwriting methodology and repayment schedule, complemented with business acceleration services.

Small and growing businesses (SGBs) in developing markets often find it difficult to borrow from local banks due to heavy reliance on collateral, complex paperwork requirements, and general unease with lending to the segment due to lack of financial or other information about the borrowers. In Nicaragua, women face additional constraints due to difficulties in posting collateral (land is often registered in a male partner’s name) and complying with paperwork requirements. At the same time, foreign investors seeking to lend to SGBs face challenges such as lack of clarity regarding investor expectations, poor alignment of capital with demand on the ground (particularly debt finance), no track record of existing products, lack of exit opportunities, insufficient instruments and products in which large investors can participate, and high transaction costs associated with structuring and executing investments. Even when these obstacles are surmounted, loan repayments may not match the cash flow generated by the company, particularly in the case of earlier stage SGBs with uneven cash flows, creating further hardship.

To address these constraints, the VPO program team has developed a loan product tailored to the needs and characteristics of women-owned and –led SGBs by basing loan underwriting on the businesses’ cash flow rather than collateral, by having a repayment schedule that is a function of the businesses’ cash flow, and by using soft collateral policies. Business Development Services (BDS) are included alongside the loan to accelerate borrower growth, strengthen loan monitoring, reduce the risk of default, and increase program impact and sustainability. Finally, the program employs a loan syndication model using an investment vehicle to enable international third-party investors to co-lend alongside the partner bank, thereby reducing the bank’s risk of testing a new product and segment and at the same time providing third-party investors with a way to invest directly in SGBs.

BAC-Nicaragua plays a vital role as the local bank partner for the current pilot stage of the program, which will make over 30 loans totaling more than $1,000,000. After the pilot, the program will expand to other countries in the region, with BAC as the local bank partner in the countries where it operates.

Two of the VPO program partners are unable to be present at the official signing tomorrow, and will sign the MOU at a later date. Agora Partnerships is a business accelerator that promotes the growth of early-stage impact companies throughout Latin America. As the BDS provider, Agora will support BAC in the identification and screening of potential loan recipients, provide ongoing BDS support to loan recipients, monitor loan recipients’ progress, track impact metrics, and prepare BDS module documentation to permit other BDS providers in geographies where Agora is not active to replicate the program. The Miller Center for Social Entrepreneurship at Santa Clara University is a learning laboratory for scaling social impact focused on accelerating global, innovation-based entrepreneurship in service to humanity. The Miller Center developed the variable repayment product on which the VPO product is based.

We will be tweeting throughout the signing ceremony, so follow @EncludeHolding and @RolandPearson for updates and photographs from the event.

The VPO program is made possible by the generous support of the American people through the United States Agency for International Development (USAID), and by the Argidius Foundation. The contents of this blog post are the responsibility of Enclude and do not necessarily reflect the views of USAID, the United States Government, or the Argidius Foundation.

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