Micro-Equity for Microenterprises

33 Pages Posted: 3 Apr 2019

See all articles by Suresh de Mel

Suresh de Mel

University of Peradeniya

David J. McKenzie

World Bank - Development Research Group (DECRG); IZA Institute of Labor Economics

Christopher Woodruff

University of Oxford - Wolfson College

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2019

Abstract

Many microenterprises in developing countries have high returns to capital, but also face risky revenue streams. In principle, equity offers several advantages over debt when financing investments of this nature, but the use of equity in practice has been largely limited to investments in much larger firms. The authors develop a model contract to make self-liquidating, quasi-equity investments in microenterprises. This contract has three key parameters that can be used to shift risk between the entrepreneur and the investor, resulting in a continuum of contracts ranging from a debt-like contract that shifts little risk from the entrepreneur to a pure revenue-sharing contract in which the investor absorbs much more of the risk. The paper discusses implementation choices, and then provides lessons from a proof-of-concept carried out by an investment partner, KGC Equity, which made nine investments averaging $3,800 in Sri Lankan microenterprises. This pilot demonstrates that this new contract structure can work in practice, but also highlights the difficulties of micro-equity investments in an environment with weak contract enforcement.

Keywords: Rural Microfinance and SMEs, Microfinance, Private Sector Economics, Private Sector Development Law, Marketing, International Trade and Trade Rules, Labor Markets, Transport Services

Suggested Citation

de Mel, Suresh and McKenzie, David John and Woodruff, Christopher, Micro-Equity for Microenterprises (April 1, 2019). World Bank Policy Research Working Paper No. 8799, Available at SSRN: https://ssrn.com/abstract=3363983

Suresh De Mel (Contact Author)

University of Peradeniya ( email )

University of Peradeniya
Dept of Economics & Statistics
Peradeniya
Sri Lanka
+94 81 2392622 (Phone)

David John McKenzie

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Christopher Woodruff

University of Oxford - Wolfson College ( email )

United Kingdom

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