How is the ESB Group different to other microfinance institutions?
As a privately held, limited liability corporation registered in the state of Connecticut and New York, we are not incorporated as a non-profit organization 501(3)(c).

While we have a strong focus on revenue generation and profit maximization, our business model is different to conventional, microfinance institutions that charge interest. Our business model focuses on micro-equity investing whereby investors receive a share of equity.

Furthermore, with most microfinance institutions, the relationship ends at the financing stage, with negligible consulting services and follow up services. By actively engaging with business leaders and community leaders, we provide these services. We do not believe “e-based” and “online” organizations can engage with those at the base of the pyramid (BOP) and their clients in such a manner.

How does the ESB Group maintain accountability and transparency?
As a registered firm in the U.S., we are fully compliant with regulatory laws. Our partner institutions must conform to local laws. We also support the United Nations Global Compact, and our clients are required to support all 10 principles of the United Nations Global Compact as well. For supplemental information, you can contact us directly.

Are there any limitations associated with current, micro loan organizations?
Local entrepreneurs and small to medium size enterprises (SMEs) are limited to debt financing. Often with punitive interest rates, entrepreneurs at the BoP and SMEs find it difficult to raise capital and grow. At the same time, loan terms may not allow the entrepreneur to expand their business rapidly.

Moreover, adequate infrastructure and regulatory factors need to be taken into consideration. By focusing exclusively on fixed income products and securitization, firms often assume developing economies have sophisticated legal and regulatory agencies, as well as, exchange mechanisms. Counterparty risk is inherent within fixed income products, and developing economies are not sophisticated to deal with issues pertaining to counter-party risk. The challenges and inefficiencies of securitization have been exposed in the U.S, in large part due to the credit crisis. In a few developed Western economies, exchanges for securitized products do not exist. Unless effective mechanisms are built to guarantee against counterparty risk, credit risk cannot be eliminated.

How does the ESB Group eliminate credit risk and risk of defaults?
We are cognizant of the fact that we cannot eliminate credit risk in its entirety, but we can manage credit risk in the following 3 main ways:

First, we joint venture with prominent, business leaders and community leaders who have a strong, fundamental understanding of local markets and its people.

Based on our business model, we take an equity, ownership stake in our clients’ businesses. While we hold a minority equity stake, our ownership position ensures we approve business purchases, processes (and other transactions) and maintain direct, oversight.

Entrepreneurs and SMEs are also required to file monthly statements with our partner organizations and The ESB Group.

Is there a real need for an organization such as The ESB Group?
We believe so, and therefore, started The ESB Group. There’s an identifiable market segment. According to the World Resources Institute (WRI), there are approximately four billion individuals around the world who have incomes of $3,000 per year in local purchasing power.

Currently, there are multiple microfinance institutions that are based on debt/interest based models. Clearly, the negative consequences and limitations of debt/interest based models are visible in the United States. At the same time, too often, larger philanthropic and venture capital organizations focus solely on BoP clients who have innovative and ground breaking ideas. If they do not have innovative or ground breaking ideas, capital is not advanced.

Based on our observations and research, there’s a segment of the market whose needs are not being met. These are BoP clients and SMEs who have access to resources, strong business models, but lack capital. They don’t have innovative ideas, but they have the commitment to come out of poverty.

Is it logical to believe that every BoP client will have an innovative idea?
If that were the case, many of these clients could approach their local banks and other alternative sources of finance within their home countries.

While we certainly value the importance of scalability, it is important to recognize the harsh and specific conditions that these entrepreneurs and clients often face. For instance, in certain countries, women still find it difficult to access capital due to HIV/AIDS. Based on this fact, should they not have access to capital, simply because they do not have the capacity or resources to support attractive return on equities, as set forth by institutional investors and microfinance institutions?

Such assumptions, to us, are inappropriate, unethical and unjustifiable. While our business model is debt-free and based on micro-equity financing, we do not feel it is appropriate to apply a sweat-equity based model.

What does the ESB Group value? How do you look forward to achieving scale and expanding?
We value people who have a viable, business model and business plan.

Many microfinance institutions are solely focused on assisting people within the tertiary sector because of their rapid growth capabilities and scalability. While this is important, we understand that an emerging nation is one in which all members of society strive towards the attainment of the optimal point on the production possibility frontier. This naturally includes people within the secondary market. This has the potential of driving positive, knock on effects. By directly supporting manufacturers, we in turn support industries within the tertiary sector that utilize their products.

By focusing on quality, long term relationships, we look forward to scaling our operations in the long run. In fact, this is one of the reasons why we encourage our partners to bring clients to the table. A well managed relationship, in our view, is important for long term success.

While we focus on longer time frames and have a long-term oriented approach/horizon, this is not because we are not comfortable with difficult situations or uncertainty. On one hand while it is important to cater to difficult situations and uncertainty, it is equally important to focus on the consequences that can potentially arise as a result of poor decisions and business failure. When a BoP client in a developing economy fails, the devastating effects have an impact on their immediate family.

However, this is not necessarily the case in a developed economy. When a spouse loses his or her job, he or she can turn to his/her spouse and family for support. They may also file for bankruptcy. A BoP client who is the sole breadwinner does not always have the choice of turning to another family member, nor do they have the option of filing for bankruptcy.

Why did you start out as an LLC and not a non-profit organization?
We realize that by introducing a risk-based profit mechanism, our clients turn to us not for aid, but for capital to expand their businesses. It increases their level of ownership and responsibility with respect to their businesses. We believe that BoP clients and SMEs in Africa and South Asia need to “step out” of preconceived notions of the “free-flow” of aid.

Are ESB Group’s ideologies and philosophies based on Islamic methods of Finance and Banking? Is the ESB Group affiliated with any political organization?
The ESB Group’s first and foremost priority is based on our mission: alleviating poverty in South Asia and Africa. We are not affiliated with any religious or political organizations, nor do we facilitate movements on part of any religious or political organization. The ESB Group is a non-sectarian organization.

In an era of globalization, there are mounting differences not only within continents, but within countries as well. In Africa, for example, you have Muslim countries in the North, such as, Egypt and Sudan, and Christian countries in the West (victims of colonization). In India there’s a growing middle class Hindu and Muslim population, so differences in religion exist at a continent and country level.

In Ascent of Money, financial, historian: Niall Ferguson discusses how as part of ancient civilization, Christians did not charge interest. So, to state that our business model is based on Islamic values and only supports Muslim led businesses and operations, in its entirety, is incorrect.

Our ultimate goal is as our mission states and it’s that simple (and transparent) – poverty alleviation in Africa and South Asia. Whether the organizations we work with and support are led by Christians, Hindus or Muslims is totally irrelevant and only leads to digression from the main issue at point – the growing masses of those at the BoP suffering from poverty.

Are there limitations associated with The ESB Group’s business model?
We are cognizant of a few of the limitations with our business model. For instance, in the case of micro-equity financing, and utilizing such a first of a kind business model, historical data does not exist against which we can back test our business model and portfolio.

At the same time, absence of historical data and readily, identifiable data on borrowers means we cannot at the moment engage in other testing mechanisms, such as, psychometric testing.