Microfranchising: An Innovative Approach in Microfinance
Over the past decade or so microfranchising has emerged as a new and exciting addition to the microfinancial toolkit. Like microcredit, microfranchising involves the utilization of credit to enhance emerging market economic opportunity and growth. Unlike microcredit, it relies on the utilization of a dynamic akin to that of a franchising system found in developed markets, albeit with an NGO or development bank acting as the parent institution.
Loosely speaking, a franchise provides the owner of a successful business model an opportunity to expand while minimizing risk, and a would-be market participant an opportunity to utilize a successful pre-existing model. As the franchise expands, all of the participants stand to benefit from gains to scale such as increased market share, enhanced buying power, greater name recognition, etc., as well as group opportunities in terms of innovation, knowledge exchange, and mentorship. It could also require the franchisee to take a loan to pay for start-up, equipment and/or operating expenses.
These same dynamics apply to the developing world, where some argue that they provide an additional layer of value added. According to the Acumen Fund, one of the things which hinders emerging market entrepreneurship is a lack of existing business structures from which to learn and innovate, thus making entrepreneurial inspiration more elusive. By minimizing the need for such creativity, micofranchising greatly expands the potential ownership pool, and in doing so sidesteps a problem which traditional microcredit has yet to solve. Likewise, by introducing both a proven business model and mentoring opportunities, the franchise model may decrease the possibility that franchisees fall prey to common business errors often associated with entrepreneurial inexperience, and provide avenues by which to train them in business and finance. In the case of certain franchises, the organization may even provide for the possibility of upward mobility within the greater corporation – a phenomenon which rarely accompanies traditional microcredit.
Another potential benefit of microfranchising is in terms of employment generation. FINCA International has reported that although microcredit has resulted in the creation of a large number of new businesses, these businesses often experience a growth plateau and fail to produce employment beyond that of the ownership team. It is hoped that both the replicating nature of microfranchising, and the aforementioned benefits inherent in the franchising model, will be a greater driver in terms of increased employment opportunities.
That is not to say that microfranchising is not without its shortcomings. For one, the franchisee is tied to the franchisor, and the failure of an organization with a large network of franchisees would result in the erosion of the support structures which helped to make the businesses profitable, possibly resulting in widespread losses and failure. In addition, some microfranchises require a minimum level of education which limits the potential ownership pool, while others require large debt burdens which increase leveraging risks.
Nevertheless, microfranchising remains an exciting and vibrant developmental tool which has resulted in the creation of numerous successful organizations. Considered one of the earliest and successful microfranchises is Grameen Telecom, founded by Grameen Foundation in 2003 in Bangladesh as Village Phone. To date, there are 25,000 Village Phone micro-franchises in Africa and Asia. More recent successful microfranchises, include SELCO Solar Light in India, the Sustainable HealthCare Foundation in Kenya, RedPlan Salud in Peru, IkoToilet in Kenya, Vision Spring, which operates in a number of countries, and Fan Milk Ltd. in Ghana.
In terms of research, the Marriott School of Management at Brigham Young University has been at the forefront of the movement for years, where Jason Fairbourne, Research Fellow and author of Microfranchising: Creating Wealth at the Bottom of the Pyramid, has conducted numerous studies and has been a leading voice of the microfranchise concept.
View some exciting videos on provocative microfranchise operations: