Investing where it counts

 

Leapfrogging focussed on the flow of physical goods and technologies across borders. The remaining divide between rich and poor regions has to do with unequal access to services and institutions. Investing where it counts looks at entrepreneurship services in the developing world, and at the big picture of finance in sustainable development.

Modern services in poor regions have two things in common: exhorbitant rates and limited access. Electricity, internet, phone, and banking fall into this category. Innovators such as Muhammad Yunus and Iqbal Quadir found that new business models were needed to bring these services to more people.

Microfinance services emerged in the 1970s as a way to provide savings accounts, credit, and insurance with small transaction amounts. In regions where moneylenders charged as much as 1000% interest per year, micro-financiers began charging 20% on their loans. The loans typically carry no collateral. Instead they are tied to opportunities for small entrepreneurship: food services in Mexico, phone access in Bangladesh, or mosquito net sales in Africa.

Grameen Bank pioneered the combination of loans with entrepreneurial education and peer support. Their work is part business, part social program. Grameen’s unique structure is described here. The success of Grameen inspired competition, particularly in microloans. The actions of less disciplined lenders have put additional strain on Grameen’s already questionable profitability.

Some challenges and criticisms that microfinance faces are summed up in a Forbes article (2006) and in a Wall Street Journal article on Grameen (2001). Microfinance certainly introduces new problems, but on the whole the sector’s growth is a strong case for its ability to bring equality to development.

In leapfrogging Nicholas Negroponte said that laptops are an educational tool. To Iqbal Quadir, the cell phone is an economic engine. His company Village Phone has a business model that builds upon the success of Grameen Bank. Clients can purchase a Village Phone ‘business in a box’ with a Grameen loan. There has naturally been criticism of selling high technology to poor people, but two recent studies show a positive effect of mobile phone use on economic growth.

New foundations are taking microfinance further by connecting lenders with borrowers directly. Kiva is such an effort, growing quickly since 2004 and operating with zero overhead. Visit their site to see how Kiva works.

Leapfrogging noted that parts of Asia and Africa still need basic farming resources to increase their output above the subsistence level. While microfinance has spread rapidly in urban areas, it has had little impact on the rural poor. IDE works around the finance shortage by selling irrigation systems at extremely low cost.

The remaining gap between big banks and micro banks is termed mesofinance, covering business loans in the $5k-$500k range. Like microfinance, this was another under-served market that is growing quickly. Mesofinance is best represented by the Alternative Investments Market of the London Stock Exchange.

ESG (environment, social, and governance, aka responsible) investment is experiencing a huge wave of interest. The change in attitude is partly driven by pension fund managers, who have a mandate to get the best return over long time periods. As investors take note of corporate citizenship, voluntary disclosure becomes advantageous for corporations.

Philanthropy is stronger than ever, reflecting the immense wealth of global corporate leaders. Recent donors include:

• Bill Gates of Microsoft to The Bill and Melinda Gates Foundation
• Warren Buffet of Berkshire Hathaway to The Bill and Melinda Gates Foundation
• Carlos Slim Helu of Latin American telecoms to health programs in Mexico
• Sergey Brin and Larry Page of Google to Google.org
• Richard Branson of Virgin to clean energy investments

Regardless of the scale of philanthropy, it needs a substantial transformation to be compatible with sustainable development. It has to become more transparent, and it has to shed the top-down model of giving where that approach has failed.

Financial resources for sustainable development are materializing. Individuals are taking advantage of new options for donating their extra income. Non-profits are learning to target the root causes of poverty. Multinationals are interacting with the world’s poor to offer better services. Perhaps most important, the openness and long-term planning that have been missing from the corporate world are making a comeback thanks to responsible investment.

 

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More resources

• WorldChanging - Social entrepreneurship and base of the pyramid businesses
• WorldChanging - Philanthropy and NGOs

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