The article in the url below focuses on the growing wealth of successful Indian entrepreneurs (such as Vinod Khosla, “the billionaire venture capitalist and co-founder of Sun Microsystems”) and their willingness to invest it in philanthropic enterprises. One quote, in particular, from the article stood out:
“Mr. Khosla said his experience with microfinance had helped shape his views on the best way to tackle poverty. He has invested in commercial microfinance lenders and has donated to nonprofit ones, and he said that moneymaking versions had grown much faster and reached many more needy borrowers.”
The article and the philosophy behind the quote draws heavily on the Bottom-of-the-Pyramid (BOP) work of C.K. Prahalad (Issues: Profit, p271):
“By backing businesses that provide education loans or distribute solar panels in villages, he says, he wants to show that commercial entities can better help people in poverty than most nonprofit charitable organizations.”
While there is certainly an important role for social entrepreneurs in CSR (Issues: Social Entrepreneurship, p189), however, I think it is overly optimistic to think businesses should exist primarily to solve social problems.
Business is the solution to market problems/opportunities that carry social value as a consequence. Firms maximize social value by combining scarce and valuable resources to meet market needs, while considering the interests of a broad range of stakeholders and planning to maximize sustainable shareholder returns over the long term. Firms can often use their expertise to aid in meeting social goals, but this should not be their primary concern. Governments and nonprofits also play important social roles where gaps in the market occur.
The danger in using for-profit organizations primarily to solve social problems is that the profit motive can easily corrupt the founding purpose. This is becoming increasingly evident in the microfinance industry (see Strategic CSR – Microfinance, September 27, 2010, below) in which the article reports that Khosla has just profited “about $117 million” from SKS Microfinance’s recent IPO (see also, more recently, Strategic CSR – Microfinance, November 22, 2010).
Take care
David
In Capitalism, Sun's Co-Founder Sees a Pathway to Help the Poor
By VIKAS BAJAJ
1287 words
6 October 2010
The New York Times
Late Edition - Final
1
From: David Chandler {msbbe096}
Sent: Monday, September 27, 2010 11:45 AM
Subject: Strategic CSR - Microfinance
The article in the url below suggests the dangers of success for the microfinance business model (Issues: Microfinance, p245):
“SKS Microfinance, India's largest lender to the poor, aims to raise about $350m this month by selling a 21.6 per cent stake in an initial public offering expected to spark a wave of listings by equity-strapped Indian microfinance companies.”
While the high rates of repayment and community structure present a real opportunity for microfinance institutions to be profitable (or at least self-sustaining), the profit-maximization pressures (higher interest rates and lower loan qualification standards) that accompany a public listing carry the potential to undermine the social-entrepreneurship microfinance goals (Issues: Social Entrepreneurship, p189):
“Muhammad Yunus, the Nobel Peace Prize-winning founder of Bangladesh's Grameen Bank - the world's most famous microlender - has criticised the commercialisation of the industry, saying profit-oriented microlenders are little different to the loan sharks they once set out to replace.”
The possibility for corruption quickly arises as the pursuit of profit spreads across the sub-units of the organization:
“SKS, which says it has 7m borrowers in 19 Indian States, also plans to boost its revenues through alliances with large companies to distribute their products - such as mobile phones and water purifiers - even as it provides rural consumers with the microloans needed to buy the items.”
The article in the second url below shows the success and rapid growth of microfinance organizations, such as SKS, in India:
“For the last three years, outstanding loan portfolios of Indian micro-finance institutions have grown by 65 per cent annually, according to the World Bank, with total loans of about $2.5bn to about 22.6m households.”
As well as reinforcing the threats:
“Typical loans average between $200 and $250, and carry rates of about 28 per cent - lower than money-lenders, albeit still expensive when compared with commercial bank rates.”
Take care
David
SKS Microfinance plans to raise $350m in IPO
By James Fontanella-Khan in Mumbai and Amy Kazmin in New Delhi
418 words
21 July 2010
Financial Times
Asia Ed1
17
New networks help ease debt dilemma
Kazmin, Amy
603 words
21 July 2010
Financial Times
Asia Ed1
17
