Can Milton Friedman Help Save Wildlife?
A relatively new lending system deployed by some US universities offers a novel solution
By David Wilkie, Ray Victurine, and Todd Stevens
October 3, 2018
A recent article in the Economist got us thinking about a novel way to overcome the challenge that almost all small enterprises in developing countries face — access to affordable capital.
A number of conservation-linked enterprises have arisen over the past decade to help communities in developing nations secure household income by marketing sustainably produced wildlife friendly goods. For example, Ibis Rice is a premium jasmine rice produced by rural farmers in Cambodia in ways designed to protect the wetland habitat of the Critically Endangered Giant Ibis — Cambodia’s national bird. Ibis Rice buyers purposefully use their purchasing power to help finance wildlife conservation and improve the lives of poor families.
A conservation trust fund that offers income share agreements would provide much needed and hard to get loans to start-up companies and would not saddle the borrower with a massive debt service burden just when they are getting started.
These enterprises often find it difficult to secure loans to cover start-up costs and to maintain liquidity until the business scales to profitability. Even when they are able to obtain loans, their high interest rates (which reflect the risk to the investor) and fixed repayment schedules usually demand that much of the income accrued by the business at the start is spent on debt service and is not ploughed back into building the business.
So even those very few businesses that are lucky enough to obtain loans may fail because the debt service burden is too high, at least when they start-up.
A relatively new lending system deployed by some US universities offers a novel solution. The concept was first presented in a 1955 essay by Nobel economist Milton Friedman titled “The Role of Government in Education,” as a means of reducing the burden of tuition loan repayment on recent college graduates.
Friedman observed that investment in education pays off not immediately but over the working lifetime of students, as they get promoted or move to better paying jobs. His insight was that rather than lenders providing fixed interest loans to students in return for lump sum payments they could use to cover tuition cost, they could “buy” a share in a student’s future earnings after graduation.
The student and lender would sign an “income share agreement” where the student would agree to pay back a loan by providing the lender with scheduled payments based on a fixed percentage of her income. Immediately after graduation, her salary from her first job may be relatively low and thus will not require a large monthly payment to the lender.
Over time as the borrower’s salary increases, monthly payments to the lender would increase. The period of the loan would be determined by the borrower’s salary growth, with payments continuing until the loan was paid off in full with interest.
Conservation trust funds typically provide grants only. Now imagine offering income share agreements to finance the start-up costs of conservation-linked enterprises. This would help turn sinking funds (trust funds that spend down their initial endowment and need to be recapitalized by charitable gifts over time) into revolving funds (trust funds where the initial endowment is replenished by the fund’s income generating investments), which donors are much more willing to capitalize in the first place.
For a conservation enterprise like Ibis Rice, the big starting obstacle was the lack of access to markets by several thousand of Cambodia’s poorest people, who had often been trapped in debt cycles to middlemen. To get the rice initiative off the ground and achieve conservation of the magnificent Giant Ibis, front-end costs included things like training and capacity building; creating an infrastructure and purchasing equipment; and development of a wildlife friendly certification process.
A conservation trust fund that offers income share agreements would provide much needed and hard to get loans to start-up companies, would not saddle the borrower with a massive debt service burden just when they are getting started, and would enable most of the early profits to be reinvested in building the business rather than being used to pay down the loan.
Friedman’s insight was that rather than lenders providing fixed interest loans to students in return for lump sum payments they could use to cover tuition cost, they could “buy” a share in a student’s future earnings after graduation.
Income share agreements would require that borrowers keep auditable accounting records so that the income share at each payment period could be assessed accurately. This would incur some costs to the borrower and lender but would also help professionalize the borrower, who would need to adopt industry standard accounting protocols.
If we can prove that this type of lending works for conservation-linked enterprises then it should also work for lenders interested in financing any type of start-up business in the developing world.
Income share agreements may have been conjured to ease the debt service burden of students who wanted to invest in their education, but it may prove to be the best way to finance small businesses in risky places around the planet — helping people and saving wildlife.
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David Wilkie is Executive Director for Conservation Measures and Communities at WCS (Wildlife Conservation Society); Ray Victurine is WCS Director of Conservation Finance and Business; Todd Stevens is WCS Executive Director of Markets.