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4 Lessons the Sharing Economy Can Learn From Microfinance

Raz Godelnik headshotWords by Raz Godelnik

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The Rise Of The Sharing Economy

The connection between microfinance and sharing economy might look a bit strange at first, but these two have actually quite a lot in common. After all, both of them are disruptive concepts that empower people and offer alternatives to the current economic system.

At the same time, there’s a big difference in their level of maturity – while the sharing economy is still at its infancy stage, microfinance is in an adolescent stage, with a total of $70 billion in loans, more than 100 million “customers,” one Nobel Peace Prize winner, and even a feature on the Simpsons.

The similarities between microfinance and the sharing economy, together with the differences in their maturity levels, provide a great opportunity for the sharing economy to learn some valuable lessons from the more experienced microfinance, just like a young kid learning from his older sibling.

There are many lessons to be learned from microfinance, but these are the four most relevant ones to the future of the sharing economy. Applying them correctly can help the sharing economy move forward successfully and maybe even get its own mention on the Simpsons.

1. Keep it real

Prof. Rodrigo Canales of Yale School of Management describes a belief that was once common among some microfinance people. “My grandchildren will have to go to a dictionary to see what poverty was, because through microfinance, we've solved poverty.” This sort of expectation is unrealistic because no matter how effective microloans are (and in some cases they aren’t), they just can’t fix all the problems that cause poverty, such as a bad education system, non-functioning government, violence and so on.

Similarly, you can also find voices in the sharing economy who view the sharing economy as the ultimate fix. “We can neither survive nor live well unless we share,” Neal Gorenflo wrote on the preface for “Share or Die.” Well, just like microfinance alone won’t save us from poverty, it doesn’t seem likely that sharing alone will be the answer to our problems.

The ability to keep it real when it comes to the impact of microfinance has helped not just to acknowledge its limits, but also to better understand how it should be used within these limits in order to maximize its impact. Keeping it real when it comes to the sharing economy will probably provide us with similar results and, eventually, with greater impact.

2. More scale doesn’t necessarily equal more impact

One of the most important issues the sharing economy is dealing with now is how to effectively scale up. In the microfinance sector scaling was and still is a challenge. For a long time the dominant thought was that if you want to increase impact, you need to grow, or in other words, more scale equals more impact.

While in some cases this equation is indeed correct, we need to remember that bigger is not always better. As Ignacio Mas and David del Ser wrote earlier this year in the Stanford Social Innovation Review, “it is the ambition of scale, rather than pure greed, that pushes most MFIs and their managers to be more financially driven, and social objectives take a back seat.”

Prof. Canales adds another argument. “Scale is going to mean lower cost. Lower cost does allow you to reach more people. But if you have a lower cost in your business model, you cannot provide more costly services. Then you've constrained your business model in a way that if there's a population that requires a more costly service, you're opting out of that,” he wrote.

The bottom line is clear. Thinking about scaling up? Prepare for tradeoffs, even substantial ones.

3. Greater profitability can attract the wrong investors

Impact might not be the only place where organizations in the sharing economy might need to make tradeoffs once they grow. Their whole identity might be in jeopardy as they grow and become more profitable, attracting capital from investors solely interested in maximizing their return on equity.

While not everyone believes greedy investors are the cause of some of the scandals we have witnessed in microfinance in the last couple of years, others believe that “microfinance has been hijacked by profiteers.” Yet I believe both sides would agree that IPOs, like those of Compartamos or SKS, increased the tension between the social and commercial components of the microfinance’s identity, often shifting companies from a social to a commercial orientation. Companies in the sharing economy who might be considering such a path should take that into consideration.

4. If you want to stay true to the mission, you have to stay true to the mission

This is a quote from Tony Sheldon of the Yale School of Management. What Sheldon means is that organizations with a social mission should learn from microfinance that first, there are implications for every step they take to move forward and they need to remember that. Second, they shouldn’t ignore tradeoffs no matter how strongly they believe they can avoid them.

And last but not least, eventually it’s not the organization’s level of profitability, its size or whether it’s a nonprofit or a for-profit that matters, but the extent to which the organization stays true to its mission. Once you remember to keep it your first priority, the remaining pieces of the puzzle will fall into place.

[Image credit: elFrank70, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.