(Reported by Xander Wheen)
The value of sustainable business practices has been thrown into question on the back of the Global Financial Crisis. Some believe that a down market begets a singular focus on profit maximisation. This article from The Australian traces a series of high profile individuals who tend to disagree. Sustainability in business remains key to Tyndall’s Roger Collison, Insurance Australia Group’s Mike Wilkins, and Generation Investment Management’s David Blood. Both Collison and Wilkins emphasise the importance of sustainability to economic survival. The growing emphasis on environmental and social issues as reflected in new governmental policy and legislation internationally, requires that a business is sustainable in terms of environmental, social and governance (ESG) goals. David Blood and his founding partner, Al Gore, see short-termism in financial institutions as a destabilising force that contributed to the current financial crisis.
On the investment side, Blood and Gore run an investment fund dedicated to sustainability. They are aware of the desirability of supporting sustainability in business for stability’s sake as well as the investment opportunities provided when market reorientation brings sustainability to the fore. So far their investment thesis shows promise; their fund was a top international equities performer last year. Blood believes sustainable development will be a key driver in investment returns for years to come. From the ashes of the international financial crisis, recovery is being led in part by some who want to start again and this time do it right.
For the full article see: www.theaustralian.news.com.au/business/story/0,,25366648-36418,00.html]]>
Has microcredit delivered on its promise to lift borrowers out of poverty? Academics have had a hard time finding evidence to answer this question. Part of the challenge of studying the impact of microcredit is selection bias. A scientific survey requires that you compare those who get a microcredit loan with a control group of similar people facing the exact same economic hardships and external market constraints. Microcredit loans may be selectively offered to only the most entrepreneurial in a community. If that is the case, then part of the impact of microcredit to alleviate poverty may be overstated.
Just recently, two academic studies claim to have overcome the challenges of selection bias and conducted controlled experiments. Abhijit Banerjee and his team from the Poverty Action Lab at MIT ran a controlled experiment in Hyberdad, India. Their report, “The miracle of Microfinance? Evidence from a Randomised Evaluation,” indicates that microcredit does not significantly lift borrowers out of poverty. Another research team led by Dean Karlan of Yale University and Jonathan Zinman of Dartmouth found similar results in the Philippines. Their report, “Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila,” established that microcredit did not lead to increases in family purchases within a year and a half of the original loan. Some argue that this research is too short-sighted. Microcredit bridges the risk divide that prevents commercial banks from funding economic activity for the very poor. Microcredit loans signal the creditworthiness of borrowers to the broader marketplace. It would take more than a year and a half to see that creditworthiness translated into increases in household consumption. The Economist concurs: “By being willing to take a risk on entrepreneurial sorts who lack any other way to start a business, microcredit may help reduce poverty in the long run, even if its short-run effects are negligible.”
For the full article see: www.economist.com/displayStory.cfm?story_id=14031284]]>
To listen to the voices of borrowers, lenders, and regulators engaged in microcredit BBC radio reporter Jo Fidgen goes to the streets in Zambia. She uncovers the “debt trap” into which some Zambian borrowers have fallen. According to one microcredit borrower who runs a sewing shop: “After I pay off the interest on my loan every month, there is no money left to invest in my business.” Rates of interest, sometimes as high as 60%, make it difficult for the owners of small and medium sized businesses to keep up with loan payments. The cost of lending is high due to the risks of operating in Zambia, including unreliable communication and transport infrastructure. To reduce interest rates requires addressing the risks and cost of operating. To significantly bring down the operating costs may require national infrastructure investment and systemic change.
The BBC follows these direct interviews with a conversation with Professor Dean Karlan of Yale University discussing his research in the impact of microcredit on families in the Philippines. Despite the rhetoric of “seeing entrepreneurship,” he found that microlenders often lent only to those who already had an established business. He also found the surprising result that it was men’s rather than women’s businesses which benefited from microcredit loans. The punchline: “microcredit is not a development panacea.”
To listen to the report, click: www.bbc.co.uk/worldservice/ business/2009/07/090729_microfinance_biz_daily.shtml]]>
Although microfinance may be the best known example of serving low-income groups through a market solution, many other models are now emerging to serve a large and growing population of poor people. Half the world’s population lives on less than $2 per day: that is 2.6 billion people. During the last few decades of increasing aid the livelihood for those at the “bottom of the pyramid” has not gotten better. The authors, however, do not dismiss traditional aid. Instead, they argue that market based approaches offer a complementary (and potentially more efficient and sustainable) way to address global poverty. They identify seven business models tailored to serving the poor:
1) Pay-Per-Use allows consumers to pay lower costs for each use of a group-owned facility, product, or service.
2) No Frills Service offers ultra-low prices for products and services that still meet the basic needs of the poor. The model relies on high volume, high asset utilization, and service specialization.
3) Paraskilling brings workers into the workforce to perform simple standardized tasks which were formerly part of expensively complex services and processes that relied on specially qualified professionals.
4) Shared Channels piggybacks products and services through existing customer supply chains to reduce transportation costs, often in challenging conditions.
5) Contract Production organizes small-scale farmers into rural supply chains. A contractor provides training, specifications, and credit to the farmers and in return promises better than market prices for their goods.
6) Deep Procurement is similar to contract production but in the manufacturing sector. This model bypasses middlemen to offer quality and marketability training to small scale producers.
7) Demand-Led Training can be compared to a “temp agency” for the developing world. This model is used to pay third parties to train and place employees for job openings “at the edges of the formal and informal sectors.”
Many of the examples come from India, which the authors find to be a particularly productive laboratory for testing marketbased models to address global poverty. To engage the poor better as consumers and suppliers requires functional public support systems: schools, courts, and infrastructure. The report makes it clear that these enabling systems still need to be bolstered to allow market solutions to emerge.
To access the report see: www.mim.monitor.com]]>
Creating a World Without Poverty could easily have been a retrospective. After all, its author has plenty to reflect upon. Instead, the book is unmistakably forward-looking. This book presents a compelling vision for the future of capitalism. It envisions a market where social businesses emerge to address social issues.
Muhammad Yunus could have rested on his laurels when he was awarded the Nobel Peace Prize in 2006. He could have simply recounted his quantitative achievements, such as: 7 million people served, more than 73,000 villages reached, at least 640,000 homes constructed, and more than US$6 billion in loans served through his Grameen Bank. He could have headed for the international lecture circuit with 30 years of stories and a nickname like the Sage of Dakka. Or he simply could have looked at the global movement that had grown up around microfinance and felt justified in taking retirement. Instead, Yunus continues to pursue his audacious vision to fight poverty through market solutions. He has not relented on his tireless work to realize new ways that capital markets can more humanely serve the poor. The thesis of this book relates to social businesses- a venture which limits personal financial gain to pursue specific social goals.
Writers on Yunus have commented that his brilliance is his understanding of the mechanics of markets. He has used the momentum of success to subvert the “theology of capitalism.” According to Yunus, businesses do not all have to be singularly profit-minded. There is room in the market for something other than what he coins a “Profit Making Business (PMB).” He calls for the growth of social businesses dedicated to solving social and environmental challenges but maintaining the structure of PMBs. He writes, “like other businesses, [a social business] employs workers, creates goods or services, and provides these to customers for a price consistent with its objectives.” The book begins with Yunus at lunch with Franck Riboud, the CEO of Danone in France. There, Yunus and Riboud agreed over a handshake to create a multinational social business. They agreed to sell Danone products affordably to the poor in Bangladeshi villages without any profit paid to investors. Profits would remain in the business to expand its reach to poor villagers or improve its product offerings. The overarching goal of this new endeavor was to improve the nutrition of poor families with the help of a successful market player. In Yunus’ mind, this was the first multinational social business – a partnership between Grameen Bank and Danone. Discerning readers might be left wondering about the conversations that took place after the big handshake moment. How did Danone justify reduced profits to its shareholders? Would this venture be left to soft marketers with public relations as their goal or would it be treated like any other Danone business unit? What key performance indicators (KPIs) would they establish? How clear were their shared measures of success? What would “serving the poor better through reinvested dividends” look like? How might this intersect with debates in social capital markets about triple bottom line reporting structures?
Some of these questions are addressed, others remain unanswered. Nonetheless, the agreement between Yunus and Riboud raised the bar on the possibilities for corporate partnerships with social purpose.
The Epilogue to Creating a World Without Poverty contains the Nobel Prize Lecture Yunus delivered in Oslo, Norway on 10 December 2006. It is entitled “Poverty is a Threat to Peace.” In it, he lays out a view that peace is threatened by an unjust economic, social, and political order. He closes with a metaphor that sustains him on his indefatigable quest to eradicate poverty: “Grameen has given me an unshakeable faith in the creativity of human beings. This has led me to believe that human beings are not born to suffer the misery of hunger and poverty. To me poor people are like bonsai trees. When you plant the best seed of the tallest tree in a flowerpot, you get a replica of the tallest tree, only inches tall. There is nothing wrong with the seed you have planted; it is only the soil-base that is too inadequate. Poor people are bonsai people. There is nothing wrong in their seeds. Simply, society never gave them the base to grow on. All it needs to get poor people out of poverty is for us to create an enabling environment for them. Once the poor can unleash their energy and creativity, poverty will disappear very quickly…”
You can quibble with this man’s vision for the future, but you have to respect the progress he has made thus far.
To order the book: www.grameenfoundation.org/yunus_book/]]>
Foresters Community Finance of Queensland argues that the lack of access to affordable capital is the major challenge to the growth of the fourth sector in Australia. In this report, authors Burkett and Drew broaden the traditional definition of financial exclusion in Australia to include not just individuals and families but also groups and organisations such as civil society organisations, social enterprises, or micro businesses. Groups as well as people are being denied access to essential capital for growth. They write,
“The range of capital options under the heading of ‘social investment’ is not generally available in Australia, though they have been explored extensively in the UK and the US. The development of these forms of capital in the Australian context will help address the financial exclusion of social enterprises, social businesses, eco businesses and microenterprises.”
Change is possible. This is a turbulent time in the Australian financial regulatory landscape with some states introducing caps on rates and fees and the Federal government taking over consumer credit regulation in 2010. The authors argue that this is not enough to address the regulatory vacuum for new forms for social investment. In the UK, specific legal structures recognise the blended nature of social enterprise: both the social goals and the commercial imperatives. They assert that Australia can better support these enterprises through Community Development Financial Institutions (CDFIs). Elsewhere these institutions have helped individuals and organisations access funding to address a range of social issues “from community revitalisation to affordable housing, small business development, job creation, community asset building, microfinance, fair personal finance, community economic development and social enterprise.” The final pages of the report showcase how Australia might develop a CDFI sector.
To order the report: www.foresters.org.au]]>
Social investment has started to take hold in at least three sectors of the economy: 1) finance, in the form of microcredit loans, 2) health, with investments in immunisation bonds, and energy, through support for clean technologies. Typically, social investment funds aim for economic, social, and environmental returns. This is sometimes referred to as the “triple bottom line.” The emergence of microfinance as a successful and commercially viable form of social investment has attracted widespread attention in the financial marketplace. Yet microfinance is just part of the social investment ecosystem. Even the founder of microcredit, Muhammad Yunus, has painted a much broader vision about how market solutions can alleviate poverty – a topic featured in his book which is reviewed in this issue: Creating a World Without Poverty.
Links are provided to the full articles so that you can investigate and comment on those that interest you.
Editor, Knowledge Connect]]>
Alliance magazine is a quarterly journal aimed at informing philanthropists and social investors about the latest trends in the field worldwide. It may be a sign of the growing popularity of new financial instruments pitched to philanthropists, that the magazine is now featuring financial products. This article provides a brief introduction to yet another social investment opportunity: community bonds. According to the author, community bonds are in use in the UK, the US, and Canada.
Citylife in the UK created a five year zero coupon social investment bond to help charities raise funds. Since 1999 Citylife has raised more than 10 million pounds for charities through these bonds. From the US the article points to the work of the Calvert Foundation. Calvert’s “flagship product” is the Calvert Community Investment Note. This instrument allows investments to be pooled and placed in a portfolio of affordable loans granted to more than 200 non-profits in over 100 countries. In Canada, the example cited is the Municipal Finance Authority of British Columbia which has had a Community Bond Program since 1995. Disappointingly, there is very little detail about the examples cited. It is unclear how the products are regulated, how they are pitched to investors and whether investors are clamouring for more. Finally, the author falls into the trap of reporting the amount of money that has been raised without any detail about the value created by this type of funding.
To begin your own investigation, see: www.alliancemagazine.org]]>
If you are looking for concrete examples of social enterprise, flick through this report. “The Phoenix Economy” features fifty examples of social innovation pioneers including businesses, financial investment houses, and governments. According to the report, the chosen fifty “create value blends across the triple bottom line agenda.” Some of the pioneers are household names including Google, General Electric, and GlaxoSmithKline pharmaceuticals. Many examples deal with the environment. For a case in point, Google is harnessing its creative talents to find renewable energy sources that can be produced more cheaply than coal (Google’s ‘RE
The Phoenix list also includes an Academy Award winning film production house, Participant Media, which produced Al Gore’s An Inconvenient Truth to alert mainstream audiences to the potential devastation of climate change. The list features a prominent venture capital firm engaged in early stage investments in green technologies as well as new business models to serve the poor. For example, India’s Aravind Eye Care System offers a tiered payment model to allow it to treat over 1.4 million patients a year, two-thirds of them for free.
Although each example has an interesting story, they have not coalesced into a new economy. To encourage such widespread change, Volans includes a ‘Phoenix ‘Manifesto’ for political leaders, a ‘Prospectus’ for business leaders and investors, and a ‘Syllabus’ for business educators. Although the short profiles of each of the enterprises leave many questions unanswered, the report is a handy reference for new forms of social investment.
To access the report see: www.volans.com]]>
For a clear risk report on the microfinance industry, the folks at the Centre for the Study of Financial Innovation give us “Microfinance Banana Skins 2009.” The “banana skins” in their title refers to potential risks, as in the classic cartoon slip-up. This report spotlights current risks associated with the microfinance industry. The risks are identified and ranked by investors, practitioners and regulators.
Microfinance is at a crossroads. It has achieved dramatic growth over the last few years and continues to grow at 25% per annum. Microfinance institutions (MFIs) serve over 100 million borrowers around the world. More than 1,200 MFIs, with assets surpassing $32 billion USD, report to the Microfinance Information eXchange (MIX). Although some thought that MFIs would be insulated from the global financial crisis, in fact the economic climate for microfinance has changed as the broader financial outlook has changed. Andrew Hilton, the Director of CSFI writes: “in the popular press, microfinance is still very much the developmental flavour of the month – and even the most battle-hardened aid veteran has to acknowledge its appeal as an alternative to the conventional ‘top-down’ model for wasting taxpayers’ money. But, as the final box in this report makes clear, microfinance currently faces serious challenges – challenges that have been exacerbated by the global crisis.”
The top microfinance banana skins are credit risk and liquidity. There is a fear that draining credit markets may expose “naked swimmers,” those institutions who were happily afloat when funding was overflowing. The economic crisis compounds weak credit quality inherent in the industry. With increasing competition among MFIs and commercial banks there is concern that standards are eroding as lenders clamour for market share. One of the looming concerns is the high level of indebtedness that already exists with borrowers. There are many juicy nuggets to take away from this report and not nearly enough space here to report on all of them.
To peel the bananas yourself see: www.csfi.org.uk]]>