Falk Zientz is building a self-sustaining microfinance distribution system which links traditional banks and non-banking organizations in Germany. Through this new system of micro lending, Falk is empowering tens of thousands of entrepreneurs to access new forms of capital and create lasting change for themselves and their communities.
The New Idea
Microloans have proven a key tool for the empowerment of business entrepreneurs not only in developing but also developed economies. However, more than 100,000 small entrepreneurs in Germany have no access to capital, which constitutes a powerful barrier to lifting people out of unemployment and poverty. Moreover, without adequate microfinance, developments in a great number of market innovations are severely restricted. After ten years of pioneering microfinance in Germany, Falk is unleashing new forms of capital for microenterprises through a superior model for the distribution and handling of microloans.
Falk trains local “non-banks,” mostly small business associations, to become microfinance institutes. He has found that small business associations are ideally best suited to provide the social and skills context for high repayment rates and low transaction costs. These institutes, upon being certified, handle applications and business plan reviews locally. Falk puts systems in place to process the credits for the institutes and provides financial incentives. This new model breaks the cost barrier, penetrates the niches, and creates a financially sustainable platform.
Falk has embedded this strategy with key stakeholders, thereby institutionalizing it in financial markets. At the GLS Bank, Germany’s largest alternative bank, he has created a backend platform for the efficient administration of the micro loans. A Microfinance Fund serves as guarantor with €100M in backup funding from the European Union and the German government. The German Microcredit Institute, a platform co-founded by Falk in the mid 2000s, serves as a training provider and certifier for the individual local microfinance institutes. Falk has already trained 40+ microfinance institutes (MFIs) and plans to issue 4,000 microloans annually once the platform has reached its target size. With this structure, Falk is building the first self-sustaining, distributed micro credit platform to reach critical size in Germany.
Ultimately, Falk will take the concept to other areas of finance at the intersection of public interest and private banking, empowering the financial sector to serve the needs of micro entrepreneurs in areas such as education, the environment, and many others.
In Germany, there are more than 150,000 startups founded every year which bring people out of unemployment. This number is impressive and has been rising due to the launch of various government programs in the 2000s targeting small enterprises. Although the majority of startups persist (only 10 percent of business entrepreneurs become unemployed after five years of founding their startups), the majority of employees never reach a sufficient income. A major reason for this is a lack of access to capital. For at least 150,000 entrepreneurs, microloans are the only alternative, as they lack the necessary securities and expected income streams to be considered clients by banks.
Because microloans have been shown to create or save 1.5 jobs on average, a large number of microfinance initiatives have been deployed in Germany with public funding. Despite this, the microfinance industry in Germany is still very small, with little capitalization, and few institutions either offering loans or working with potential borrowers to ensure their success. Furthermore, loan underwriters have few incentives as they do not have a stake in the loan. Instead, they are merely channeling borrowers to other institutions, thus hindering the growth of the whole industry. Most of the existing microfinance initiatives failed to become financially self-sustainable due to high distribution and processing costs per loan. In addition, many commercial banks shy away from offering microloans at higher interest rates due to fears of adverse public relations. Most importantly, however, the lack of supportive and enabling communities around borrowers and a lack of expertise among industry financiers concerning the requirements of the potential borrowers (i.e. unlike in many developing communities) results in a high default rate. Thus, no microcredit platform in Germany has succeeded in achieving sustainability outside of limited niches, i.e. long-term unemployed youth.
Falk recognized that for microcredit to be successful in Germany it required scaling up. The industry needed to secure more access to capital by building and enhancing the number and capacity of loan providers and their affiliated institutions which both identify and assist borrowers in launching successful businesses. He recognized that the only way to do this was to rely on non-traditional banks as distributors. To work, these distributors, which must have deep ties and developed trust in local communities, will rely on larger intermediaries in the banking sector, which could provide both training and access to capital. With longstanding experience as a central player in many microfinance initiatives in Germany, Falk created Mikrofinanzinitiative (German for Microfinance Initiative), as a platform to bring together the necessary stakeholders.Fauk’s approach is an innovative delivery system, which first secures the largest pool of capital heretofore available to the MFI sector. He then implements a structured series of incentives to the MFIs themselves, in which they are evaluated on the numbers of loans they provide in addition to how each loan performs over time. MFIs thus have “skin in the deal” and are both encouraged to do more underwriting without diminishing their due diligence and the services provided to borrowers.
A further critical element in helping the sector scale up is how the Mikrofinanzinitiative works with local business associations, and the many existing startup and SME support and infrastructure organizations, many working in less developed regions and cities, or for less economically integrated constituencies, i.e. migrants or young people. These entities are becoming the key distribution points for microloans. Though most have not been engaged in lending activities in their work, providing microloans is a great opportunity for the associations to better serve their target groups. To become certified Microfinance Institutes, each prospective MFI receives an initial one-day workshop with Falk. Next they are trained by the German Microfinance Institute (DMI), in loan processing, business plan evaluation, and other relevant processes. The certified MIFs work with micro entrepreneurs seeking microloans ranging from 1,000 EUR to 20,000 EUR. Examples of MFIs include a cooperative of small to medium enterprises in Dortmund, an association of Turkish business people in Bielefeld, and a self-help group of migrants in Berlin. With this bottom-up approach it becomes possible to reach into the niches of the market, break the cost barrier, and generate a high level of self-organization among all market participants.
Falk has also created a program with GLS Bank for online backend credit processing. All payments are being made to and from GLS Bank, which pays a gratification for each approved loan to the MFI as an incentive. The fund which Falk established through the GLS Bank is backed by 100M EUR (i.e. operates with the capital interest from this sum) from the European Social Fund and the German federal government, both of which also support the marketing and communication around the fund.
Falk grew up in a small village in the Black Forest among the Green movement and other active citizen organizations. From a young age, he actively campaigned for environmental causes. While studying in Berlin Falk initiated and coordinated a 500,000 EUR tour of 350 students, entrepreneurs, and artists to the former Soviet Union and Mongolia, leveraging his talents as a master organizer and convener of disparate partners. After his studies, Falk got exited about the concept of “new labor” and the power of micro entrepreneurship; deciding to work in this field.
Falk joined the GLS Bank in its pioneering stage as an “ethical bank”, where he gained key on-the-ground insights to credit processing. After five years, he quit the bank to support microfinance initiatives in other regions, such as Eastern Europe and Russia and to found a number of microfinance-related initiatives in Germany; which came to shape his life mission to radically change the state of microfinance in Germany. After having set up several smaller funds together with Deutsche Bank Foundation and some MFIs Falk co-founded the German Microfinance Institute as a center for further education and capacity-building in the field of microfinance. He finally re-joined GLS Bank as an independent agent with the authority to develop and pioneer microfinance activities. Falk’s affiliation with GLS has been central to his ability to secure the infusion of significant capital into the sector, and to continue to innovate at the interfaces of public interest and commercial banking. Today, the German government frequently asks Falk for consultation on innovative social finance mechanisms.