In the ten part innovation series, the first type of innovation is about innovating in the business model. One of the micro-finance organizations, RangDe is innovating in the same area.
The concept of microfinance has been proven globally. For people who don’t know what microfinance is all about, here is a brief introduction. The term Microfinance is used to refer to the activity of providing financial services to clients who are excluded from the traditional financial system due to their lower economic status. These financial services are mostly loans (called as microcredit) and micro-savings. A few microfinance institutions offer other services as well, such as micro-insurance and payment services. For example if you’re domestic help wants a loan of Rs.1000 to help her son to start a roadside vegetable shop. It is impossible to get this sum as a loan from banks today. The other option is to take this amount as loan from unorganized sector (like local money lenders) for an exorbitantly high interest, which never allows them to clear what they have borrowed.
This is where microfinance comes into picture. Small loans can be given to poor people along with adequate training to make them small scale entrepreneurs. In fact this is exactly what Dr. Yunus has successfully done in Bangladesh for which he received Noble peace price in the year 2006. By building a system inherently tied with collective liability, Dr. Yunus has demonstrated 99% of loan repayment. Also this loan prevented poor people from local lenders who mostly exploit them through their high interest rates. There are three major players in the microfinance chain: lenders, microfinance organization (along with their field partners) and loan borrowers. Traditionally lenders are seen as bankers and financial institutions.
RangDe a microfinance organization has innovated around this business model by opening up the lending opportunity to retail investors. Given below are a list of innovations which have been worked around the business model and which is adding real value in the whole chain.
- Any individual can be a lender or social investor. They can invest as low as Rs. 100. This ‘peer-to-peer’ lending is radically different from how microfinance was perceived. A new platform for social investors is through a website.
- Any individual can create profile in the website, choose the person they want to lend money and make payments online. The website opens opportunities for new individuals who were hesitant to invest due to lack of transparency, delay in processes or sheer laziness. Now becoming social investor is as simple as investing in stock market or buying mutual funds online using a demat account. Also lenders can track the progress of the buyer and plan for their future investments accordingly.
- The complete chain is built, starting with the social investor to the borrower in a transparent way. Apart from creating the online platform for investing, RangDe has partnered with many grass-root level organizations or field partners who would look into the due-diligence of an individual as a borrower by going through their profile, needs and micro business plans. This plays a very critical role in creating trust in the overall system.
- Sustainable economic model is built for everybody in the chain. The borrower is charged 8.5% interest (which is very less compared with other organizations) out of which 5% is given to field partners who identify and collect loan repayments. Field partner incurs expenses for all this and the 5% the borrower pays is just enough to manage these costs. The remaining 3.5% interest is given back to the social investor.
By taking the basic concept of Microcredit and innovating around the business model, RangDe has opened up a new marketplace for social investors. In the bigger picture such innovative models play a very significant role in eradicating poverty in emerging countries like India.