Divide 2: Finance
1. Overview
2. Showcases
3. Market Opportunity
1. Overview
40% of the world’s wealth is owned by 1% of the population, while the poorest 50% can claim just 1% of the wealth. As the financial divides have grown increasingly dramatic in recent years, the urgent question is how to bridge and begin to close them. Among the main opportunities that exist involve helping the have-nots become bankable, insurable and entrepreneurial.
We invite comments and other inputs. For further information or to express an interest in taking part, please contact John Elkington or Alejandro Litovsky.
2. Showcases
Examples of finance-related market opportunities..
· Linda Rottenberg and Endeavor: Stimulates and supports entrepreneurship and new venture creation in emerging markets. Over its 8 years of operation, Endeavor has screened over 12,000 candidates in 10 countries and selected 236 certified Endeavor Entrepreneurs that have generated more than 25,000 new jobs and nearly a billion dollars in wages and revenues.
· Fundacion Social: A 100 year old Colombian non-profit “holding“ with 12 highly successful and competitive for-profit social businesses focusing on banking, housing, and insurance In low-income sector. One of the social businesses, Banco Caja Social Colombiana (BCSC) is among the largest providers of financial services and mortgages in Colombia and Latin America. Fundación Social’s focus is on creating the conditions whereby civil society and business organizations in poor communities can emerge and thrive. It is the 5th largest private financial group in the country with 6% of the banking market with 5 million poor clients who benefit from its 320 offices in 56 cities. Fundación Social prioritizes its workforce of 7,500 providing personal and family benefits.
· Amitabha Sadangi and IDE-India: Designs, develops and delivers small plot irrigation technologies that are commercially viable, one-fifth the cost of its competitors and scaled down to fit one-tenth of a hectare plots. IDE equips its customers – poor rural farmers – with the skills and linkages they need to move onto high value commercial agriculture. Today, over half a million pieces of IDE equipment (treadle pumps and drip irrigation kits) have been bought by farmers. Over 90% of the users of drip irrigation kits are now able to repay capital investments in irrigation equipment and earn net increases in income within a single season of 2-3 months. Farmers now cultivate throughout the year, migration to urban areas has been reduced and food security increased. IDE is now exporting its technologies to partners in six African countries.
· Roshaneh Zafar and Kashf: The fastest growing microfinance institution in Pakistan and one of the fastest growing in the world, Kashf delivers collateral-free microloans, savings and life insurance products to poor women through branches that become sustainable within 18 months. Thirty-five percent of its clients move out of poverty within three years. Kashf made 228,603 loans during 2006, has 135,797 clients and maintains a recovery rate of 99.9 percent. It intends to expand operations to 600,000 clients by 2010.
· Matt Flannery and Premal Shah, and KIVA: After seeing first-hand in East Africa how a small loan could change the life of an entrepreneur in the developing world, Matt and Jessica Flannery co-founded Kiva.org in 2005 to enable individuals to loan as little as $25 to emerging businesses. Matt quit his job at TiVo to work full time as Kiva’s CEO and Premal Shah, a Product Manager at PayPal, joined Kiva as its President to help scale the idea. In its first three years, over 148,000 internet lenders made $22 million in loans to 33,000 entrepreneurs in 40 developing countries. Kiva aims to scale to one million internet lenders and over $100 million in loans by 2010.
· Safia Minney and People Tree: Works with 70 producer groups in 20 countries across Asia, Africa and Latin America, improving the lives of marginalized communities through fair trade. It is the first fair trade fashion company to break into high street garment retail.
· Willy Foote and Root Capital: Provides loans of between $25,000 and $500,000 to small and medium-sized enterprises targeting sustainable agriculture and fisheries, wild-harvested products, certified wood and ecotourism. Since the organization launched in 1999, it has raised more than $17 million in low-interest loan capital from 50 private investors and has made 407 loans valued of over $80 million to rural producers in Latin American, African and South Asian countries.
· Vikram Akula and SKS Microfinance: By standardizing, using principles of McDonalds and Starbucks, Akula and SKS Microfinance manage to overcome the problem of insufficient dissemination of microfinance especially in rural areas in India. Since its foundation in 1998, SKS Microfinance has lent over 3.2 billion rupees, has provided loans to nearly 350 000 poor women and has approximately benefited 1,5 million individuals.
3. Market Opportunities: The Financial Divide
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The notion that the haves will find ways to gain more and that the have-nots will lose more has been acknowledged since biblical times. But the already staggering divides in financial wealth have become even more dramatic in recent years as globalization and the spread of capitalism have skewed earnings and assets in many countries. In the United States, for example, the divide between rich and poor has been growing. By 2003, the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent a year before.
And China, which now has tens of thousands of multimillionaires, is going through its own age of robber barons.
For many business—and political—leaders, this is the way of the world, particularly of the capitalist world, but extreme financial inequality can sow the seeds of insurrections and social cataclysms. So deep-seated are these drivers of economic injustice that entire societies have often had to be recalibrated by rebellions or revolutions. Where a suitable public policy context exists, governments can use taxation and related forms of wealth redistribution to address the financial divide. But where the tools and frameworks for economic justice are weak or nonexistent, entrepreneurs have much to offer in ensuring that—at worst—the divides do not grow further. Financial divides offer real opportunities to make things better for particular populations and groups.
Consider how the work of Childline’s Jeroo Billimoria has evolved since 1995. Not content with simply bailing out children in distress, Billimoria has embarked on a new effort to break the cycle of poverty by teaching children about their rights and responsibilities—specifically, how to deal with money—and empowering them. This initiative was originally called Child Savings International and is now branded Aflatoun, which in India is a colloquial term used to refer to an intelligent, adventurous person who is not afraid to be different or to speak up. This is a leveraged non-profit venture (Model 1) that is fully grant and volunteer-dependent, with strong ambitions to morph into a hybrid non-profit (model 2) that has a stream of earned income.. The concept was developed and tested in India before being rolled out in more than a dozen developing countries. The hope is that it can be replicated by franchising the model and branding to banks and other financial institutions internationally—in the process, generating a strong, ongoing source of revenues.
Billimoria suggests that the implications of Aflatoun’s work for mainstream business is this: “Business needs to be agile, able to take quick, participatory decisions. Then, apart from the obvious issues of cost-effectiveness, accountability, and transparency, our experience shows that there is huge strength in diverse teams—drawn from different cultural backgrounds, from different sectors (for example, civil society, government, and business), and from different levels of society.”
Another model 2 (hybrid non-profit) enterprise that has something of a head start in this space is KickStart, whose wild ambition is to help bridge the wealth divides by stimulating the growth of an entrepreneurial sector and, as a result, to create an African middle class. The organization seems well on its way to helping such countries as Kenya and Tanzania attain this goal. It creates new businesses and jobs by developing and promoting new low-cost technologies, which are bought and used by local entrepreneurs to establish profitable small-scale businesses. By identifying, developing, and marketing technologies with a high cost-benefit ratio, KickStart helps the entrepreneurial poor play an effective role in the market economy, substantially increasing their income levels and helping create jobs for others.
KickStart’s success in selling its technology often raises the question of why it has not morphed into a model 3 for-profit social venture. After all, its income revenue stream is substantial and growing. But KickStart’s hybrid nonprofit status is the result of market failure. In the rich world, governments generally subsidize research and development to promote new technologies; governments in developing countries typically have other priorities and spend very little in this area. Private sector companies in these developing countries, meanwhile, rarely create new products and technologies for the poor, who have minimal purchasing power. To address this market failure, Kick- Start develops innovative, appropriate, and affordable machinery that people can use to start and increase the efficiency of small businesses in rural Africa. It uses its grant income to subsidize the research and development process that no company or government will undertake, and the resulting impact is huge.
By the end of 2007, KickStart equipment had been used to create fifty thousand new small enterprises, with more than eight hundred new businesses created each month. These businesses generate nearly $452 million annually in new profits and wages and employ over thirty-five thousand people. The farmers purchasing KickStart technology today are the John Deere and Caterpillar consumers of tomorrow. This fact has not been lost on John Deere; the company has partnered with KickStart to help accelerate that trend. Amazingly, it is estimated that KickStart’s activities now generate over 0.6 percent of Kenya’s GDP and 0.25 percent of GDP in Tanzania. This really should be a case taught in business schools worldwide—it can offer much suitable case material and many lessons to the rising generations of mainstream business executives.
On an even larger scale, consider the work of Fazle Abed in Bangladesh. He founded BRAC—the former Bangladesh Rural Advancement Committee—to fight poverty, illiteracy, and child mortality and to support women’s health and development on a massive scale. His organization mobilizes the latent capacity of the poor to improve their own lives through self-organization. BRAC’s full-time staff of over forty-five thousand has helped 3.8 million poor women establish a hundred thousand village organizations. BRAC now has over 5 million members in more than 180,000 village organizations across Bangladesh. In the process, BRAC identified “backward” and “forward” market linkages needed to boost economic opportunities for the poor. For example, when it found that poor women were not profiting from rearing dairy cows, it improved the breed of cow (a backward link) and set up a modern dairy (a forward link). In a prototypical case of the power of shifting the focus from risk and citizens’ rights to opportunity and self-improvement, BRAC helped change the global development paradigm from that of helping “needy beneficiaries” to encouraging villagers’, particularly women’s, self-development.
When asked what mainstream business might learn from his experience, Fazle Abed says, “Poor people’s livelihood opportunities tend to be constrained by market failures. It is a pity that business supply chains do not extend to them either as producers or consumers. BRAC’s experience proves, however, that profitable enterprises can be initiated that expand the opportunities for the poor.” While it would be misleading to suggest that such impressive market positionings can be built in short order, or in timeframes that western capital markets are likely to be comfortable with, such organizations now have a huge reservoir of knowledge and experience in identifying and evolving base-of-the-pyramid markets for those with the appetite to take their businesses in this direction. The case of the joint venture between Danone and the Grameen Group is a striking example of how visionary business leaders and entrepreneurs are already driving into this space.
One lesson we draw from these cases is that the Henry Ford dream of jump-starting the creation of an entire middle class is alive and kicking in unimaginable places. Business leaders interested in developing long-term market positions in regions like East Africa, Asia, and South America would be well advised to seek out, engage with, and find ways to support such entrepreneurs. It may seem almost impossible to move the needle on something as big as a national economy, but people like Fazle Abed of BRAC and KickStart founders Martin Fisher and Nick Moon are demonstrating that it is well within reach of those able to dream big dreams and to develop the business models needed to turn those dreams into reality.