Bottom of the Pyramid: Throw Out the Cookie-Cutter Investment Approach

By Abby Callard, Beyond Profit

So, you have an innovative business model that you think will improve the lives of millions of people living on less than US$2 a day? Next step: finding capital.

Finding, and maintaining, capital is one of the most challenging aspects of running any new enterprise, and businesses operating in the Bottom of the Pyramid (BoP) space are no exception. As I pointed out in my first post in this series, reaching this market often requires creating a new business model altogether, and investors tend to shy away from completely new ideas, said Naushir Colah from Aavishkaar at the Srijan Financial Inclusion Forum 2010, because they see them as risky.

Jessica Seddon Wallack, Director of the Center for Development Finance, urges those to “think beyond traditional investments.” Those investments might come in the form of a new type of capital. Two new buzzwords have come out of this idea: impact investing and patient capital. Both of these shun the idea that an investment is a way to make a quick return.

Impact investing rebukes the traditional idea that investing is all about financial return. In this model, investors are also interested in the social benefit generated by their capital. So, they might not see a great financial return on investment, but the social return—such as seeing children from the slums get a good education—is great.

In a presentation to the Indian Philanthropy Forum earlier this month, Ashish Karamchandani of Monitor, stressed that investing in the BoP space is not for those wishing to make a quick buck—even though the recent SKS IPO has investors seeing billions in the business of loaning to the poor.

“No one remembers all the money the World Bank gave [to MFIs], all they remember is SKS and Compartamos and all the money they made,” Karamchandani said. “Microfinance should not be the benchmark.”

Investing in BoP businesses requires patience and an interest in the double bottom line: financial return and social good. Acumen Fund, one of the pioneers in the social investment space, labels this idea “blended value.” Each business is a mix of economic, social and environmental elements.

Acumen Fund, which was founded in 2001, operates as a non-profit that seeks out charitable donations and invests them in private enterprises that promise long-term financial viability, scale and social good. All profits generated from these investments are used to invest in new enterprises. As of 2007, Acumen had invested in 21 organizations that created 16,000 jobs.

Acumen functions as a test of sorts. If the organization can prove its financial sustainability with an investment from Acumen, it can then move on to more traditional types of capital: banks, venture funds, etc.

In a 2007 article in innovations, MIT’s journal, Acumen Fund CEO Jacqueline Novogratz stressed that there is no “cookie-cutter approach” to funding businesses that address poverty. Different goods require different capital. For private goods, where individuals benefit from investment, such as drip irrigation, the market can support the endeavor eventually. But for public goods, such as clean water, the market can never fully support projects. For this reason, diversified capital—high-risk philanthropic capital, high-return capital, government funding and aid—is key.

Finding capital for BoP businesses involves engaging investors who are interested in more than just the traditional return on investment (ROI). More and more investors are looking at ways to get the most out of their money, and that might just be investing in the social space.

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4 responses

  1. Interest rates: The Poisonous Fangs of MFIs

    MFIs were touted to provide the poor access to affordable credit, reduce poor people’s need to use moneylenders and indebtedness. In short, provide a much kinder, cheaper alternative to the village loan shark. Instead, they evolved as the new class of institutionalized loan sharks which neo-liberals gave respectability to. MFIs did improve access to micro loans but failed in their touted mission to provide affordable and gentler credit and above all, one that lifted people from the clutches of poverty. Objects of institutional financial sustainability exhort them to charge interest rates and fees high enough to cover the costs of their lending and other services.

    MFIs argue that they need a spread apart from all costs to provide for contingencies and growth. Fine but the moot question is how much should be this spread.

    MFIs argue that economies of scale and competition will drive interest rates down. This remains only a theoretical argument. “Mexican micro-finance institutions charge such high rates simply because they can get away with it”, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates micro lenders!!

    If at all, the average Indian MFI interests rates appear more benign than in Latin America or Nigeria, then it simply because other than factors internal to the MFI industry, the sector faces strong competition from governmental and NGO SHG micro-saving programmes in the absence of which, these MFIs would have formed a cartel. Past angry public and government reactions that resulted in a backlash against them, which included the arrests of MFI top leaders, like Uday Kumar of Share Microfinance Ltd as in 2007, keeps their profiteering impulses under check.

    The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. By 2014, they target to reach 110 million borrowers. Remarkably, despite two decades of operations, if statistics are to be believed, these MFIs only reach just 20 million people in the country, a good proportionate of them, multiple counted. Yet, they succeed in gaining an attention, so disproportionate to this minuscule reach. Act now to prevent they becoming an epidemic in the country. Act now, when they are most vulnerable.

    And how do know they are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells us so:

    “We are facing collapse. Unless something changes on the ground, the industry as we know it is basically gone. ”

    Mahajan, we have news for you. The day when the likes of you are gone, that will be the turning point for the fight against poverty!

    What’s wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates.

    Read More:

    1. I believe that you have done enough research to arrive at your version of poverty alleviation. Now let me give you a good news. They are bogus when you say that the poverty alleviation will start when people like Vijay Mahajan are gone. This only goes to show that you know nothing of the economics of poor. You are fundamentally wrong when you compare two absolutes which are not comparable such as interest rates for poor and rich. A poor earning Rs200 a day after selling Rs.1000 worth vegetable gets a return of 20% per day. You can do the math for return every year which is far higher than 30% to 50% per year. It is not about interest rate which keeps them poor but the unmanaged risk which they face. I am not denying that MFIs have committed mistakes but is it not the philosophy of life where we learn from our mistakes? We must give one more chance to the industry to learn from the mistakes and continue working for poor.

  2. Nearly all the communities in India (such as Bengali), are succumbed in ‘Culture of Poverty'(a theory introduced by an American anthropologist Oscar Lewis), irrespective of class or economic strata, lives in pavement or apartment. Nobody is at all ashamed of the deep-rooted corruption, decaying general quality of life, worst Politico-administrative system, weak mother language, continuous absorption of common space (mental as well as physical, both). We are becoming parents (mindlessly) only by blindfold self-procreation, simply depriving their (the children) fundamental rights of a decent, caring society, fearless & dignified living. Do not ever look for any other positive alternative behaviour (values) to perform human way of parenthood, i.e. deliberately co-parenting of those children those are born out of ignorance, real poverty. All of us are being driven only by the very animal instinct. If the Bengali people ever be able to bring that genuine freedom (from vicious cycle of ‘poverty’) in their own life/attitude, start/involve themselves in ‘Production of Space’(Henri Lefebvre), at least, initiate a movement, by heart, decent Politics will definitely come up.
    – Siddhartha Bandyopadhyay, 16/4, Girish Banerjee lane, Howrah-711101, India.

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