Base of the Pyramid
Not The Next Microsoft — But Maybe As Important
Monday, January 21, 2008 / KW
With Muhammad Yunus, founder of Grameen Bank and co-winner of the 2006 Nobel Peace Prize, currently touring the US to promote his new book, Creating a World Without Poverty (which I co-authored with him), this is a good moment to mention an important new report about the business prospects of microfinance.
Yunus, of course, is one of the creators of the microfinance concept, which has expanded from his native Bangladesh and now serves some 100 million clients around the world.
Linked via the invaluable WBCSD website, this report from Deutsche Bank details the growth of the microfinance sector, categorizes the many microcredit institutions around the world according to their profitability, and offers ideas concerning the future prospects of microfinance as an investment opportunity. Key findings include:
Amongst all SRIs [social responsible investments], microfinance investments increasingly attract institutional and individual investors due to their double bottom line. While they allow investors to adopt a social investment strategy geared toward poverty alleviation they offer an attractive risk-return profile at the same time. . . .
By 2015, we expect institutional and individual investments in microfinance to rise sharply to around USD 20 bn. The underlying assumptions are that (1) microfinance will gradually evolve into a niche investment product that will increasingly attract retail investors and benefit from the general strong rise in SRIs. Furthermore, it will appeal to a wider range of commercial investors as it might even be conducive to investors' portfolio diversification. (2) A critical mass of MFIs [microfinance institutions] will over time become capable of absorbing foreign funding.
The report goes on to list the world's fifty leading MFIs, beginning with Grameen Bank, with its almost seven million borrowers and a return on equity of over 22 percent, and including such well-known and financially successful institutions as Compartamos in Mexico, ACSI in Ethiopia, and Equity Bank in Kenya.
It's remarkable to see microcredit, which was born just a little over thirty years ago when an economics professor reached into his pocket for $27 to help a handful of starving villagers in Bangladesh, attracting this level of interest from the financial community while still maintaining its roots in the developing world and its historic role of helping poor people lift themselves and their families out of poverty.
As you might expect, the success of microcredit as a business response to social needs has attracted a few skeptics, especially those from what might be called the "anti-development-aid" community. Here are the latest comments I've seen from Thomas Dichter, author of Despite Good Intentions: Why Development Assistance to the Third World Has Failed and co-editor of a new book devoted to "debunking" microcredit:
"The biggest myth about this [microfinance] is that it goes to start a business," said Thomas Dichter, the co-editor of What's Wrong With Microfinance?
Borrowers use the money to survive, by earning a few pennies a day, selling bags of rice or cups of tea, he said.
"Let's not make the mistake that these are mini-entrepreneurs or future Bill Gateses. They are not," said Dichter, an international development consultant. "They are just trying to get by."
What strange comments these are from a supposed expert on microfinance. Concerning the comparison to Bill Gates: Check out the list of top-50 MFIs from the Deutsche Bank report. The last column of the table lists average loan sizes offered by the microfinance institutions listed. They range from $35 (from an MFI in Bangladesh) to $2,601 (from one in Chile). These loans would seem to be on the small size if the idea is to launch the next Microsoft or to create the next Bill Gates.
But, of course, no one associated with microfinance actually speaks in terms of creating the next mega-enterprise. The whole idea of microcredit is to help people start tiny businesses (micro, get it?) that will enable them to support themselves and their families in decent fashion.
If this involves "selling bags of rice or cups of tea" — activities that Dichter seems to regard with contempt — then so be it. Some people might consider that preferable to letting people starve.
And when the borrowers multiply until you have hundreds of thousands or millions of them — which has now actually happened in one country after another — you end up with financial institutions of respectable size, providing useful services, at a profit, to large customer bases.
The essence of sustainable business is thinking creatively — looking at actual conditions on the ground and letting those dictate the business strategy, rather than trying to solve a real-world problem by imposing preconceived definitions. Perhaps "experts" like Dichter are having trouble leaving behind their preconceived definitions of "business" and "entrepreneur" and recognizing that, in a poor village in Pakistan, South Africa, or Ecuador, a useful business might be one that sells rice or tea rather than computer software.
And as a result, these "experts" have trouble seeing that microfinance is turning into one of the most significant business success stories of our time. By contrast, the actual Bill Gates, through his foundation, is offering financial support to microfinance in Latin America.
Unlike Dichter, Gates knows a good business idea when he sees one.
The Poorest Billions — Today's Entrepreneurial Frontier
Sunday, July 01, 2007 / KW
Speaking of Muhammad Yunus, I see that Business Week has just named him one of its Thirty Greatest Entrepreneurs of All Time, alongside such icons as Andrew Carnegie, Thomas Edison, Henry Ford, and Sam Walton. At first glance Yunus might seem a surprising choice, since many people think of him more as a humanitarian than a business person. But his Grameen Bank is a self-supporting, profitable business, and Yunus's mission in life has been to expand the benefits of the free market to poor people who are currently excluded from full participation in the capitalist system.
In this respect, Yunus is very much in the mold of Ford, Walton, and others on the BW list. Like them, he has innovated by developing accessible products and services that are creating whole new classes of consumers and multiplying the life options enjoyed by millions of people.
If the entrepreneurial frontier in Henry Ford's day was made up of millions of working-class Americans desperate for mobility, today it includes billions of people in the developing world eager to enter the mainstream economy.
At Vanderbilt B-School, the God Squad and the Money Gang Are Finding Common Ground
Friday, June 29, 2007 / KW
A rather fascinating article from the Financial Times (link via the World Business Council for Sustainable Development website) describing a new program at Vanderbilt University in which students from the MBA program and the divinity school are joining forces to explore how business can help combat global poverty.
Dubbed the Project Pyramid Global Poverty Alleviation program, the course is housed in the Owen Graduate School of Management and was originally proposed by two MBA students, Rehan Choudhry and Bobby Deneen. It's not a fluff course: In March, the students traveled to Hyderabad, India, where they visited the business school, a Microsoft campus, and local villages where they observed how microcredit is affecting the local economy. They will also participate in a business-plan competition, and two of the students have already launched a company that uses the Internet to provide artisans in Uganda with access to a world market.
The Vanderbilt course takes its inspiration largely from two figures: Grameen Bank founder and 2006 Nobel Peace Prize winner Muhammad Yunus (himself a Vanderbilt grad), and C.K. Prahalad, the leading guru of "bottom of the pyramid" business. (Full disclosure: I am currently working on a book with Yunus, which will describe his concept for what he calls "social business," a topic I'll write more about on this blog in the weeks and months to come.)
What's most intriguing to me are the reports that students on both sides of the MBA/divinity school divide say they are learning a lot from one another. The business students are discovering that government and philanthropic programs can play an important and useful role in expanding economic opportunities, while the divinity students are learning that business can be about much more than the rapacious pursuit of profit.
We in business like to talk about "thinking outside the box," but sometimes we behave as if that just means borrowing ideas from whichever management guru happens to be hot this month. The Vanderbilt course is a true experiment in cross-fertilization between widely differing worldviews, something we can certainly use more of in our all-too-compartmentalized world.
