Micro-Equity for Microenterprises

40 Pages Posted: 30 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 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. We develop a model contract to make self-liquidating, quasi-equity investments in microenterprises. Our 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. We discuss implementation choices, and then provide 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 our contract structure can work in practice, but also highlights the difficulties of micro-equity investments in an environment with weak contract enforcement.

Keywords: alternative financing, Contract Enforcement In Transition, micro-equity, Microenterprises, Microfinance

JEL Classification: G21, O12, O16

Suggested Citation

de Mel, Suresh and McKenzie, David John and Woodruff, Christopher, Micro-Equity for Microenterprises (April 2019). CEPR Discussion Paper No. DP13698, Available at SSRN: https://ssrn.com/abstract=3379614

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1
Abstract Views
130
PlumX Metrics