Crowd-funding: When Development Financing Goes Social

In our lifetime, we have witnessed a digital revolution, one that has shelled us with telephones, pagers, computers, big-screens, mobile devices, and tablets in rapid succession; putting, finally, the expanse of human knowledge quite literally at our fingertips. This revolution has changed life as we know it, with visionaries in the world’s Silicone Valleys churning out new technologies and culture-altering social media platforms daily. But how then, in light of the Facebooks and TurboTaxes that have transformed both work and play, has development financing remained so insusceptible to the power of technology? With innovative financing platforms sprouting up left and right, we discuss today why development should embrace new tech, and how.

Of the constant barrage of new ideas, devices, and social media platforms we see today, crowd-funding stands apart as possibly the best fit for development financing. A vehicle by which small, individual contributions are leveraged to support a common objective, crowd-funding is  increasingly widespread, financing ideas, projects, and even the careers of aspiring musicians and athletes. Despite its growing popularity and success, however, the relationship between development and crowd-funding remains under-explored. As a result, the IDB Group’s Multilateral Investment Fund (MIF), is taking matters into its own hands, paving the way for crowd-funding to play a larger role in development.

Enter Cooperativa de Ahorro y Credito (ABACO), a Peruvian non-profit credit union that has found its niche in developing innovative solutions to resource shortages in Peru’s agricultural sector. Established in 1981 by Peruvian Nikkei, or Japanese descendants, ABACO has come a long way; once exclusively serving the Nikkei community, it now supports the general public and has been ranked Peru’s top credit union  in terms of assets, loans and deposits since 1997.

Enter the Multilateral Investment Fund (MIF), an Inter-American Development Bank institution also committed to Peru’s agricultural sector. Recently strengthening ABACO’s capital through a subordinated loan, the MIF is, among other things, helping ABACO secure resources through a partnership with Music Securities, projected to reach more than 13,000 rural micro and small enterprises and small-scale farmers through 36 strategic partners. A regulated Japanese financial broker, Music Securities has created a successful crowd-funding platform that channels resources from thousands of Japanese individuals to small scale, high impact projects. With an impressive track record and a knack for innovation, Music Securities may well become the IDB’s gateway to crowd-funding for development.

Founded in 2000, Music Securities began as “Securite,” a pioneer platform that enabled individuals to help, through contributions as small as US$100, young musicians fund their first albums. In 2006, it began supporting small Japanese companies struggling to access traditional bank financing. In 2009, Music Securities went international, structuring Japan’s first retail microfinance funds to channel resources to microfinance institutions in Cambodia and Vietnam. Today, the company has structured more than 200 funds with contributions from over 70,000 Japanese individuals. Upon this success, founder, President and CEO Mr. Masami Komatsu was named a “Young Global Leader” by the World Economic Forum.

The resources raised and channeled by Music Securities are reimbursable, thus the beneficiaries are motivated to achieve the sustainability of their businesses, however the re-payment structure is compatible with their cash flow. Financial returns to the individual investor are based on certain pre-established parameters and are sometimes combined with a nonfinancial return. For example, learning tours for individuals who contributed to microfinance funds interested in making site visits to the microfinance institutions they supported.

This is a first experiment between the MIF and Music Securities, two institutions in pursuit of excellence. It is expected that it will provide strategic knowledge outputs that would set the basis for a successful dissemination of the outcomes in other countries and with other financial and crowd-funding institutions. But more importantly, this innovative initiative will set the basis for a better relationship between Latin America and Japanese individual social investors.