Archive for the ‘Opinion’ category

Kiva launches in India with poor product experience

August 20th, 2012

The leading crowd-sourced microcredit platform,, has recently launched micro-lending in India.

I am a big fan of Kiva and I am a personal lender on the platform having made more than 200 loans — see my Kiva lender page.

But their micro-lending product for India is very different than what they offer for other countries.

Unfortunately, it is a very poor consumer lending experience. Here are a few of the issues:

  • all loans are for 3 years (minimum) — even though loan term is only typically for 6-12 months
  • loan capital is auto re-loaned to whomever the MFI wants to lend to during remainder of the period
  • no details provided on loan repayments until the end of 3 years
  • lender takes currency downside risk (but not upside!)

And there’s a warning that India regulations are really unpredictable, so you might not get your money back even if it’s repaid.

I don’t think most lenders are going to be excited about these terms! If there’s a high likelihood that a loan is never going to be repaid — implied in Kiva warnings — then most funders would want to structure their loan as a donation and take the tax write-off upfront … not in 3 years.

I’m very surprised that Kiva would launch such a poor quality micro-lending product. They have historically been a leader in delivering quality micro-lending products. I don’t think this is going to work well for them.

I am very familiar with some of the challenging regulatory issues in India, but platforms like* are providing a much better consumer micro-lending experience without all of these limitations. I do hope that Kiva quickly fixes their product as there is huge demand for micro-lending in India.

*Full disclosure: Unitus Seed Fund is an investor in Milaap


Microfinance is more than a loan

October 24th, 2011

Poor children are key beneficiaries of their mother's microcredit loans

Interesting personal experience article by Jitin Mitra on the status and impact of microfinance in India.

As a result of the microfinance crisis in India, there has been a significant decline in the availability of microloans for poor Indian workers. While certain politicians gloat that they are protecting poor borrowers, Jitin notes that “the reality is that millions of poor families have been forced back to traditional money lenders who have been far less beneficial, often charging over 50% interest and claiming collateral following defaults.” And, when poor families pay higher interest rates to moneylenders, this reduces their (already meager) disposable income. While mothers often take the brunt of the impact by reducing their own consumption (e.g. fewer/smaller meals per day), inevitably their children are also impacted.

Also what’s so often overlooked in an evaluation of microcredit is the empowerment benefits provided to most women borrowers. Jitin notes that “[Microcredit borrowers’] confidence had soared as they were now able to provide for their families and in turn, gained respect within their communities.” If we care about social justice and equal opportunity, well-managed microcredit is one of the most powerful tools that has demonstrated empowerment benefit at scale.

Jitin also reminds us of a recent study commissioned by the Small Industries Development Bank of India (SIDBI), an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India. It showed that borrowers benefitted significantly from microfinance. Amongst the findings were that:

  • 76% were able to increase their income through MFI assistance
  • 66% improved their food consumption
  • 56% could improve their housing conditions
  • 77% could provide better educational facilities
While there are necessary and important reforms needed for a fast-growing industry like microfinance, we need to continue to advocate on behalf of the poor to ensure that power-hungry politicians don’t de-rail programs which have huge benefits for the poor.

Questions about Unitus changes

August 11th, 2010

I wish I had posted this closer to the announcement date, but I still think this will be helpful for people who care deeply about Unitus and microfinance/poverty alleviation…

I am a board member of Unitus, a global poverty 501c3 charity which recently announced that it is redirecting its efforts from microfinance to new areas of reducing global poverty.  This came as a shock to many people who have valued the transformative work that Unitus has done to dramatically increase access to financial services for poor families.

False and Misleading Rumors

Unfortunately, false and misleading information about this announcement have become widespread.  This is very disheartening because:
(a) The significant positive impacts Unitus has made on behalf of the global poor have been largely ignored, and
(b) Concern that Unitus’ announcement indicates that microfinance no longer requires innovative philanthropic support.

In an attempt to correct some of these misconceptions, I have re-stated some of the most common questions that I’ve been asked along with my thoughts that I shared in conversations with multiple people:

Q: What is Unitus’ mission? Vision? Approach?

Unitus’ mission is to help eliminate global poverty.  Like Nobel Peace Prize laureate Muhammad Yunus has said, we want poverty to be something future generations can see only in museums. From the start, we have been agnostic about methods.  We are not about microcredit, profits, nonprofits, or any other methodology.  We have searched for highly leveraged ways that we might uniquely contribute to empowering millions of poor working families with the opportunity for economic self-reliance. We are strong believers in identifying and accelerating the activities and approaches that most effectively reduce poverty and empower the working poor. We see market systems and capitalism as powerful tools that can and should be harnessed to bring opportunity and sustainability and global impact.  We are committed to identifying high-impact projects with clearly defined and measurable goals.  When we determine our work is done with a particular job, we will declare that we are done, then exit and pursue other worthy projects.

Q: What did Unitus announce?

With approximately $50 billion of microfinance capital now available to more than 150 million of the world’s working poor — and a large and a growing community of philanthropic and (now primarily) commercial microfinance institutions serving this previously greatly underserved market — we feel the time is right for Unitus to seek out other transformative fields of endeavor. Accordingly, going forward Unitus will no longer initiate new microfinance partnerships. We will honor all existing obligations and commitments to existing MFI partners, then move on to new high-value activities. Consequently, Unitus will be downsizing its operations to a small team as we identify new transformative projects to reduce poverty.

Q: What project has Unitus completed?

Our first project was focused on attracting commercial capital into the microfinance sector.  When we first started on this project 10 years ago, almost all microfinance was funded by philanthropic capital.  Less than 10 percent of the working poor had access to microfinance and growth was slow due to capital constraints and lack of innovation.  Our vision was to identify entrepreneurs building the next generation of microfinance organizations in underserved and un-served markets and to support them in demonstrating the financial viability of commercial microfinance operations.  The results of our endeavors have been beyond our imagination when we started.  Our partners are now serving 12-plus million poor families, and represent some of the most innovative, efficient, fast-growing financial organizations on the planet.  And many of them are passing on those efficiencies by regularly reducing interest rates paid on microloans by the working poor to levels never seen before. A recent IDB survey reported that “profit-making MFIs (charge) lower interest rates [than non-profit MFIs].”  This is significant.

Therefore, Unitus is declaring “project accomplished” (which I think is a more accurate statement than the politically charged “mission accomplished” language.) We set out to accomplish a specific project — attracting commercial capital to the microfinance sector.  There was broad agreement amongst Unitus staff and board (although not unanimous) that we had reached our demonstration effect goal. We looked extensively at (and actually experimented in a few) other geographies where we thought our consultative approach to accelerating access to high-density microcredit might apply and we concluded that the right situations did not exist for Unitus to have further transformational impact.  Since our organization and structure was set up for this project, the board unanimously decided that the right decision was to: (a) wind down the existing microfinance accelerator organization; and (b) with a small team, begin new explorations for areas where we could start new projects that had similar transformative potential on global poverty.

Q: The announcement felt so abrupt. Why?

I think it felt abrupt because so many people care so much about Unitus and had expectations that Unitus had a long-term commitment to microfinance beyond our initial project commitment.  It also felt abrupt because Unitus announced we were downsizing our staff size not due to funding issues or staff performance issues or other more common reasons that charities reduce their expenses.  It also felt abrupt because Unitus staff members, with the board’s determination that the microfinance project was complete, were hard at work identifying new opportunities for Unitus projects. And it felt abrupt because the board chose to announce the changes soon after they were finalized, because we wanted to have sufficient resources to help impacted Unitus employees to find their next world-changing roles.

Q: Is innovative philanthropic capital still needed for microfinance?

Yes! There are many situations where there are still market failures or gaps in delivering financial services to poor families. In many cases, these will require strategically and innovatively targeted philanthropic resources to move things forward. There are also many good philanthropic microfinance organizations that have long-term commitments to improving the microfinance sector, so we believe there is greater need for our particular skills and contributions elsewhere.

Q: Will donations received before this announcement be allocated to microfinance or to new Unitus philanthropic activities?

All donations received prior to the announcement will by default be directed towards microfinance activities, including the completion of our existing microfinance commitments and the wind down of our microfinance operations.  For donors who wish for their monies to be allocated towards new Unitus philanthropic activities, we will provide a mechanism for doing this. To be clear, 100 percent of donations to Unitus are and will be used exclusively for philanthropic purposes.

Q: How much money does Unitus have remaining?

Until we finalize fulfillment of all of our existing microfinance commitments and obligations, we will not have an exact number. We are taking the approach of being generous to fulfill not only the letter, but also the spirit of our commitments wherever feasible. Also, as noted above, we still need to have conversations with donors who may want remaining portions of their donations allocated to new Unitus philanthropic activities.

Q: Will Unitus be able to properly invest donor monies with a smaller staff?

Yes. There will continue to be sufficient professional staff to effectively allocate and invest donor resources into projects approved by the Unitus board.

Q: Did Unitus time this announcement because of the upcoming public offering of SKS Microfinance?

Absolutely not. Our timing was based entirely on the factors I outlined above: our desire to make a transformative difference in other fields of poverty alleviation, and within the context of our existing microfinance commitments, to be the best possible stewards of the financial and other resources with which we have been entrusted.

Q: Why can’t Unitus talk more about its involvement with SKS Microfinance?

Under India law, Unitus is considered a “promoter” for the SKS Microfinance public offering, and is restricted from any public commentary about SKS Microfinance during the quiet period before and after the public offering.

Q: Did (or will) Unitus board members personally benefit from Unitus Equity Funds?

Absolutely not. Some Unitus board members did provide investment capital for Unitus Equity Funds (a separate commercial social venture fund setup in 2006). These investments either came through: (a) family/community foundations; or (b) personal investments with a commitment for all proceeds to be used for charitable purposes. So, 100 percent of any financial returns to board member-related investments are committed to further charitable activities.

Q: What are the new philanthropic projects/activities for Unitus 2.0?

There are many significant areas of market failure which deny the working poor the opportunity to thrive and reach their dreams and potential. Traditional international development approaches have continued to fail to deliver results. We are currently researching systems, approaches and strategies where we believe there is the potential for transformative impact to create large-scale, sustainable opportunities to reduce global poverty. We will be announcing more details soon.

Unitus has published a follow-up FAQ.

If there are additional questions in which you think a larger audience may be interested, please post in comments.


Why do we call them non-profits?

May 27th, 2010

I was at an interesting Seattle Social Venture Partners event tonight for a discussion on philanthropy. Doug and Maggie Walker very openly shared their journey along the path of giving their time and money towards their passions.

One of the words that seemed to keep jumping out at me tonight was the term “non-profit.”

Some of this might have been because I’m still processing the thought-provoking new book I just finished called Uncharitable by Dan Pallotta which researches the origins of why we think of and require charities to be not-for-profit organizations.  Dan discovered that the non-profit mandate is an American invention which came out of early American Puritan (Christian) doctrine. Puritans believed in the “depravity of man” and so worried that growing materialism would lead to “worldliness” and corruption. So, they instituted charity as a penance for making money.  “So, how could you possibly make money helping the poor if helping the poor was your penance for making money?

So, today we talk about “the non-profit sector” and the predominant description and defining characteristic of charities is that they are “non-profit”.  Why do we focus on this?  Why do we focus on what they’ve “not” vs. what they “are”?

There have been attempts to refer to charities as “non-governmental organizations” (NGOs).  But again, why the “non” emphasis?

Alternatively, we describe charities as 501c3’s (based on IRS section which authorizes their tax treatment).  But, we don’t refer to attempting-to-earn-profit companies predominantly as “C Corps”, “S Corps” and other government technical descriptions, do we?

Automobiles were once called horseless carriages.  But that didn’t last too long because they were important enough to get their own defining category.

I think language matters.  By constantly referring to charities as “non-profits” or “NGOs” we are continuing to re-enforce the belief that these organizations … many of whom are seeking to solutions to the largest and most important social challenges of our generation … as 2nd class citizens or somehow not that important.

I have been as guilty as anyone of this language issue.  So, I’ve decided to take a small step and to stop using the terms “non-profit”, “not-for-profit” and “NGO” and to start experimenting with new language which is more positive and reflective of the importance and value of charities.

I’m going to experiment with terms like “for benefit organizations” and “social enterprises” and other terms. I’m not sure what term will “win out”, but I’m interested in the feedback and reactions of people as I start on this new language trail.

And this doesn’t even begin to address the question about why charities can’t earn profits… (I know they can technically do so in some circumstances, but it gets pretty complicated with IRS)

Perspectives on Myanmar

April 21st, 2010
Remains of library building destroyed by Cyclone Nargis

Remains of library building destroyed by Cyclone Nargis

Earlier this month, I visited Myanmar (formerly Burma) and had the privilege of meeting with a wide variety of people from all walks of life.  Earlier, I posted a summary of the current situation in Myanmar. I thought I would share some of my interactions to help paint a picture of current day Myanmar.

Part II: Perspectives on Myanmar

WorldVision Team.  We were able to meet with James Tumbuan, country head for the large INGO, WorldVision based in Yangon.  James explained to us that WorldVision started operating in Burma in 1960 and now has 31 active area development projects.  They also have a significant operation in the Irrawaddy Delta in response to recovery efforts after Cyclone Nargis hit in May 2008.  In Bogalay (delta), we were warmly greeted by the WV staff and generously transported by speed boat to visit 6 villages in the delta which had been largely destroyed by Nargis.  We were able to visit some pretty remote villages where WV has been building schools, early child care and development centers and many other relief and development services.  I was impressed with how their projects were designed in partnership with each community.  We met one WV staff member who was continuing to volunteer in supporting communities after her contract was finished!  The WV engineering team also helped us estimate the cost for construction of library buildings!

College Bond Students.  Dottie Guyot and her husband James set up a Pre-Collegiate Program to help Myanmar high school graduates prepare for and earn scholarships for overseas college programs.  I was invited to lead an introduction to microfinance discussion with the current class of 15+ students.  I realized in the midst of comparing microfinance with the typical financial services available to middle class citizens that these students had no personal experience of a functioning financial system.  In 2002, Myanmar’s banking system largely stopped operating.  There are no credit cards.  Loans for individuals and most businesses are unheard of.  Everything is a cash economy.  Besides North Korea, I can’t think of another country which has no banking system!

The Ambassador.  I met with U Nyunt Tin, former ambassador to Canada, France and Indonesia and a retired Myanmar air force officer.  He explained to me that he had participated on the constitutional advisory council assisting with the new Myanmar constitution.  He said it was a fascinating process engaging with a wide variety of people including many leaders from the minority ethnic groups.  While he admitted that the final result was a compromise, he was quite encouraged by the result and broad-based participation.  He is involved in setting up a new microfinance program and has personally committed much of his assets to get this going in a substantial way.  We had a good discussion about the opportunity to present to the central bank some good examples of pro-microfinance regulatory frameworks successfully adopted and implemented by other emerging countries.

Village Girl.  In one Irrawaddy Delta village, I was able to interview a girl of about 9 years old.  She explained how during Nargis, she survived by clinging to her father’s back as the waters rose.  She lost her mother.

Military Attache to US Government.  I met with a retired woman who had worked for a number of years in Washington DC as the office manager for the Burma military attache.  As the main office English speaker, she was the go-between in all of the official and unofficial dealings.  Later she worked for the UN in Myanmar as an expert on disaster relief.  She and her brother, a retired professor, were so excited about our work to rebuild Nargis destroyed libraries that they accompanied us to Bogalay.  I had an interesting discussion with her about life in Rangoon (now Yangon) during the Japanese occupation for 3 years in the second world war.

Rice Farmers.  Over 3 days, we visited 10 separate villages in the Irrawaddy delta which had in common that their libraries were all destroyed by Nargis.  In each village we had the opportunity to meet with the village leadership including the local headman.  In most cases, their primary occupation was rice farming.  We learned that Nargis flooding caused salt to be deposited on their rice paddies “poisoning” the paddy fertility.  Four harvests later they are still having lower yields.  If that wasn’t enough, Nargis killed all of the snakes and owls … the only predator of rats, which survived.  Rats now destroy their crops.  Additionally, small crabs introduced by Nargis flooding also destroy rice yields.  This is very challenging situation.

The Librarian.  I met multiple librarians in Yangon and Bogalay.  At one privately operated community library in Yangon called Dr. Chitmaung Library, we met an impressive librarian and one of her volunteer staff members.  They had very creatively figured out how to make the library operationally financially self-sustaining.  They generated income from annual memberships ($2/year), small fees for English classes and fees for PC usage in their Internet cafe.  They had no budget for books or periodical acquisition so they relied on us and other donors for their collections.  Their PC lab was largely managed by college-aged youth who previously took advantage of library services as children.  This was one impressive operation!

Municipal Librarian.  In Yangon, we visited the largest municipal public library and met the staff.  They excitedly showed us the English language children’s books that they have received from us.  They were now for the first time attracting children to their library.  They showed us their e-library which consisted of a dozen PCs and a library of 100+ CD-ROMs mostly oriented towards college prep.  They still didn’t have any Internet connectivity.  We also saw stacks of a booklet with info on the upcoming election which they told us was very popular.

Library Entrepreneur.  We met the young brother and sister duo, Zar Ni Htet and Khin Kyi Nyoon who had recently established a new college prep library and learning center in downtown Yangon called Knowledge Bank.  They have a vision for helping high school graduates gain the skills necessary to attend college in Myanmar or overseas.  They have created a first class facility including a library of ebooks which members can access via Amazon Kindle or Sony eReader.

IDE.  I met Jared in Bogalay who works with IDE Myanmar.  I first learned of IDE through Paul Polak’s Out of Poverty book.  He was in the delta to interview farmers who were using their products including their small farm optimized treadle pump.  Jared told me that engineers in Yangon had designed a new treadle pump costing $10 lowering the price from their current $25 product.

Business Owner.  I met with a business owner who operates multiple businesses in Myanmar.  He earns most of his revenue related to tourism.  He explained to me how the government limits and duties on importing automobiles required him to pay $100,000 for a car which would cost < $30,000 in the USA.  He also described how he had to pay $1,500+ for his mobile phone number.  He exports a number of artisan products, but he can’t export to the USA due to sanctions … only hurting artisan workers.

MFI CEO.  I met with Fahmid Karim Bhuiya, CEO of Pact Myanmar, the largest microfinance bank in Myanmar called Pact Myanmar.  Fahmid was previously with BRAC in Bangladesh moving in 1997 to Myanmar to start this new MFI.  Over the past year they have added 100K+ clients for a total of 423K client representing about 80% of MFI clients in Myanmar.  They have a loan portfolio of US$25M with average loan size of $76 supported by a staff of 1,700.  They are one of the largest employers in the Irrawaddy delta where they have dramatically expanded since Nargis.  Their major funder is UNDP.  They have reached financial break-even despite 30% inflation.  They have 400+ clients per loan officer which is very efficient especially considering the population density where they are operating.  Impressively, they now offer 9 financial products including health loan, agriculture loan and education loan.  There biggest challenge is the lack of financial regulation in Myanmar which requires them to continue in an ambiguous legal state as a UN project.

The situation in Myanmar

April 11th, 2010

Boy fetching water in Yangon, Myanmar

I just returned from 7 days in Myanmar (formerly called Burma).  I’m going to make a couple of posts on my learnings and thoughts.

Part I: The Situation in Myanmar

Myanmar has been under military rule since 1962 after becoming independent from the British Empire in 1948.  Myanmar has made global headlines over the past few years on the following topics:

  • Continued house arrest of Aung San Suu Kyi — the face of the democratic resistance and promoted recently by Bono in U2’s concerts
  • The ongoing international sanctions led by USA and EU to “pressure” the military into convert to a democracy
  • The Burmese monks protest in 2007 which was brutally repressed by the military
  • The devastating Cyclone (hurricane) Nargis in May 2008 which killed an estimated 150,000-200,000 people and left many more injured and vast damage
  • The new Burmese constitution being rolled out ahead of elections scheduled for later this year

In many ways Myanmar is a very dysfunctional place due to its military rule and international sanctions.  Here are just a few examples:

  • Cell phone numbers cost $1,500+ and (along with landlines), don’t work reliably
  • Automobiles cost 4-5x what they do in the USA (hence, out of reach for vast majority of 50M+ populace)
  • The country has been in civil war almost constantly since 1948 independence
  • Electricity is only available in major cities.  In Yangon (largest city at 5M+), it only runs 12 hours/day and less everywhere else (except the newly formed capital city in the middle of nowhere)
  • Internet access is severely restricted by censoring (probably worse than China)…and with electricity outages…
  • All non-government operated schools were banned in 1962 eliminating the best schools … and universities were purposely split up after 1990 dishonored elections
  • Essentially no banking system (for anyone) after 2002 foreign banks were pushed out and key domestic banks failed … so everything is a cash economy … literally!

Some of the bright spots:

  • High literacy rate — 90%+ … Burmese love to read!
  • Private schools, while still not authorized, are now tolerated and provide an option (for people with money)
  • Myanmar has vast natural resources – including timber, gems and oil/gas – and was once the world’s largest rice exporter
  • Private investment has been increasing in the past few years — both domestic and foreign
  • The currency is now pretty stable … with only 30% inflation
  • The Burmese people (and many other ethnic groups) are hard-working and English (the global business language) is the 2nd most used language
  • Elections are coming!  While the military has structured the new constitution so that they can continue to control, these are the first elections in 20 years and the first potentially elected government since 1962.

In the next post, I’ll share about the amazing range of interesting people I met with — including a former ambassador, some of the most interesting domestic and international NGOs at work in Myanmar, the head of the largest microfinance institution, government officials, a major local investor, the retired head national librarian, students who are preparing for overseas college, village leaders, village farmers and teachers, business people, librarians, children in villages and more.  Read more…

Haiti doesn’t need more donations

January 24th, 2010

Haiti-quakeWith well over $1B donated so far to Haiti relief, the issue is not more donations, but effective deployment of existing donations.  If the Indian Ocean tsunami of Dec 2004 is any lesson, nine months after well-meaning intentions, just 39% of the money promised had been spent.  It was just not possible to spend the donations faster in any reasonably helpful way.  It is even more likely this will be the case in the devastation of Haiti.

What’s Next?

Paul Collier, an economist at Oxford University and author of The Bottom Billion, believes that a temporary new administration (instead of the current Haiti government) is required to administer proper allocation and investment of donor monies.  The emphasis is on investment, not just unaccountable hand-outs which Collier knows have been a complete boondoogle in Haiti and other poor countries.

There is enthusiasm from folks like Jeff Sachs for donors to commit $10-15B to Haiti for a grand 5 year rebuild.  While this sounds all wonderful and hopeful and exciting, this has been tried many times in situations like Haiti and has not worked.  Easterly, a former World Banker, has de-mystified this failed approach with data.  Calderisi, another World Banker has documented the failure of this strategy in Africa.

Bottoms Up, Not Top Down

Status quo approaches to aid are fundamentally flawed because they focus on a top-down “planner” approach where the giver assumes to know the formula which will work.  The real world doesn’t work this way.  This contrasts with the bottoms-up “searcher” approach where ownership is taken locally to experiment to find local solutions which actually work on the ground.

From a previous blog post:

The main issue, [Easterly] argues, is that our international aid agencies … are run by planners, not the entrepreneurial, finding-what-works “searchers”. We in the West are very utopian with a grand plan to eliminate poverty always the goal and what the politicians like to talk about.

If we really care about prosperity for Haitians

In the short-term, many Haitians need help to survive.  Most of this must come from foreign charity.   Let’s not confuse this with what Haitians need longer-term to thrive.

I believe Haitians deserve the opportunity for a better future, not another failed attempt of utopian charity.  To increase their own prosperity, Haitians must attract foreign private capital and generate an export economy which leverages its key competitive advantages … low cost of labor and proximity to the USA export market … to grow its economy.  A purely super-sized continuation of what some have called Haiti, “The Republic of NGOs” is recipe for continued human misery for most Haitians.

UPDATE 4-20-2010:  Interesting recent post:  Haitians don’t deserve our Sympathy

A Smarter Approach to Global Warming

December 15th, 2009

copenhagen_consensusI thought that the change I voted for was going to prioritize a more rational and facts-based approach to addressing the major issues of our times.  I thought that we actually were going to start to abandon our top-down, failed-from-the-start approaches to helping the poorest and to start “exploring” new approaches that might actually work.

Bjorn Lomborg leads the Copenhagen Consensus Center (Facebook page), a think-tank that recommends to governments and philanthropists around the world about the best ways to spend aid and development money … based on primary research and the consensus opinion of a lot of smart people who look at the data.  Bjorn thinks that climate change is a major issue and he thinks we’re thinking about it all the wrong way.

In an op-ed piece today, he argues “Investing in energy R&D might work.  Mandated emissions cuts (haven’t and) won’t.”

What is an example of a better investment?

Focusing on investments to reduce the at-risk malaria population (mosquito nets, environmentally safe indoor DDT sprays and new therapies) would save 78,000 times more lives than the same money spent on climate change.

Some more Bang for the Buck recommendations.

If you have an open mind to hear a perspective not getting the media attention in Copenhagen this week, I highly recommend that you read Bjorn’s article.

Please post your thoughts in comments about what you think of Bjorn’s thoughts and reasonings.

What poor people really want

October 23rd, 2009

Vanuatu-BoyBjorn Lomborg of the Copenhagen Consensus (see my previous post on Priorities for helping the world’s poor), posted an OpEd in today’s WSJ entitled “The View from Vanuatu on Climate Change“.  Vanuatu politicians have been some of the most vocal proponents of carbon cuts to prevent global warming destructive impacts on his country.

Rather than theorizing a lot about what the poor really want (which is essentially the approach of the Copenhagen Consensus), he decided to visit the tiny island nation of Vanuatu and ask some locals about how they would prioritize things.

Here’s what one woman said: “Having a boat in the village to use for fishing, transporting goods to sell, and to get to hospital in emergencies.  She doesn’t want more aid money because ‘there is too much corruption in the government and it goes in people’s pockets,’ but she would like microfinance schemes instead. ‘Give money directly to the people for businesses so we can support ourselves without having to rely on government.'”

I won’t comment here on the extreme disconnect between her country’s president and her situation.

Microfinance is very effective in getting cash to the poor

One of the lesser told benefits of microfinance is that money actually does get into the hands of the poor.  Every penny of every $50 loan is accounted for in financial records which are then audited regularly.  Every borrower has a pass book which details what they’ve received and paid.  And I know from first hand experience that even illiterate borrowers understand very clearly exactly what they’ve received, paid back and their outstanding balances.  It is much more difficult for governments and other middlemen to get in between the transactions and fraudulently steal money designated for the poor like what happens in most other charitable schemes.

As Mother Teresa would say (in paraphrase), “We talk a lot about the poor when we need to be talking to the poor.”

Priorities for helping the world’s poor

November 9th, 2008

There was an interesting article in this weekend’s Wall Street Journal’s Weekend Journal called “A New Dawn” which featured too very different perspectives on climate change. One article by Ian McEwan focuses on how developed countries should focus our budgets on climate change and the second article by Bjorn Lomborg focuses on how we need to focus our budgets on doing things which will have the broadest impact for humanity and the world.

I think both articles are a good read and both articulate very strong perspectives and arguments. I am most intrigued though by the arguments made by Bjorn Lomborg as they are more global in nature, so I’m going to focus more on his ideas in this article. Lomborg is a professor at Copenhagen Business School and the organizer of the Copenhagen Consensus, an interesting gathering of some of the world’s smartest scientists and economists which attempts to gain a “consensus” on the priorities for doing the most good with our investments. I wrote about this process earlier.

Here are a few of Lomborg’s facts/observation of climate change forecasts:

  • The UN science consensus expects temperature increases of 3 to 7 degrees Fahrenheit by 2100, leading to sea-level increases of 0.5 to 2 feet. This is similar to the 1.5 feet of sea-level rise experienced in the past 150 years.
  • Warming in this time-frame will mean about 400,000 more heat-related deaths globally and 1.8M fewer cold-related deaths according to Ecological Economics publication.
  • Economic models estimate a decrease in global GDP of about 3% by 2100. The UN expects that in this same timeframe the average person will be 1400% richer.
  • Kyoto compliance requires spending of ~$180B per year through 2100 with an eventual reduction of global temperature of an eventual estimated 0.3 degrees Fahrenheit.

He points out that these climate change-related investments might make sense as the top priority in a world of infinite resources and no other major issues. The reality is that we face many other moral decisions … life and death decisions affecting 10’s of millions of people … which must be considered. Here are some of the other potential priorities:

  • Agriculture output. Climate change is expected to reduce agriculture productivity by 1.4% by 2100. By 2080, global agriculture output is expected to more than double. If we did nothing to reduce the impact of global climate change, this doubling would be delayed until … 2081.
  • Malnutrition. Global warming is forecasted to increase the number of malnourished by 28M by the 2100. Today there are 900M malnourished people. We expect to add about 3B more people to the planet by 2100. By that time, the number of people malnourished is expected to drop to 100M. This is more of a political will issue than a financial issue.
  • Kyoto vs. Hunger. Spending $180B per year through 2100 on Kyoto will avoid 2M hungry by 2100. Spending $10B per year, the UN estimates could save 229M people from hunger today. Spending directly on hunger (vs. indirectly through carbon reductions) is 5,000x more effective. Climate change (if fully realized) would only address 3% of the hunger problem.
  • Foreign aid effectiveness. Focusing foreign aid on areas such as direct malnutrition policies, immunization and agricultural R&D would return value of 15-20x the good than the cost.
  • Innovation vs. reductions. Incentives for creating new technologies (a cornerstone of Obama’s proposed plan) which offer low-carbon alternatives will deliver 11x more good than the cost. Whereas simple CO2 cuts produce $0.90 return on the dollar. He encourages countries to spend 0.5% of their GDP on low-carbon innovation incentives.

I am not an expert on the numbers quoted, so that requires further review and validation. I do admire intellectual honesty and a genuine debate with all of the facts on the table as we have some very important priority decisions to make now with a new President and Congress. I’m hoping we’ll put aside philosophical arguments and let the best ideas win out … especially for the sake of the world’s poor who have no voice.

Social business wealth sharing examples

November 9th, 2008
Unitus Leadership Summit 2008

In October, I had the opportunity to travel to Indonesia to participate in a leadership event (sponsored by Unitus) for CEOs and senior managers of some of the world’s most innovative and fastest-growing social businesses. Most of these businesses are in the microfinance sector with a few in other emerging social business sectors. Countries represented at the gathering included India, Mexico, Philippines, Cambodia, Tanzania, Kenya and Indonesia. We had great discussions on bottom-of-pyramid (world’s 4B poorest citizens) topics including: savings products, insurance products, mobile banking/payment, serving ultra-poor and capital raising in our current financial crisis.

I had the opportunity to lead a discussion on the topic of distribution of wealth created by social businesses. There were a number of interesting discussions and examples of how these leading social entrepreneurs are thinking about and acting to implement broader wealth-sharing initiatives. Here are some of the highlights:

Starting as a non-profit operation. SKS Microfinance, the fastest growing microfinance institution in the world with 3M clients based in Hyderbad, India, started in 1998 as a NGO. When they transformed a few years back into a financial company, they setup a trust to hold the cash generated during this process plus shares of the new finance company. The trust is managed by a group of trustees elected by the finance company’s borrowers with a mission of serving the borrower’s community. One of the issues they’ve faced is the ownership dilution of the trust’s shareholding in the finance company as the finance company has raised new equity capital. The trust does not have sufficient cash to invest to maintain their ownership level as the finance company valuations have grown, so by default they would own a smaller % of the outstanding shares after each new financing round. SKS’s management team and earlier social investors have creatively sought to reduce the trust’s dilution impact by issuing stock options to the trust. This has allowed the trust to maintain a 20% ownership stake in the finance company without having to buy new shares. The impact on the existing and new investors (including founders/management) is that they are effectively giving up some of their upside to allocate more upside to the trust. I believe this is a very interesting model for social businesses in similar circumstances.

Starting as a for-profit business. Equitas, a fast-growing (0-100,000 clients in less than 1 year) microfinance company based in Chennai, India, setup from their start in 2007 as a shareholding finance company. The founders were upfront with their investors that their mission was to build a social business. At the start, they setup a separate trust which was granted 5% of the stock of the finance company with the mission of serving the educational and other needs of their target segment of the working poor. In addition to setting up a management stock ownership program, they setup up a employee stock option plan which reaches to all levels of employees. This is almost unheard of in India. Additionally, the founder is planning to allocate additional future options which he is granted by the board to the trust. These are a number of innovations which others can learn from.

Stock options for all employees? There was a lively discussion on whether it made sense to grant stock ownership opportunities beyond the senior management down to the broader employee base (in the case of microfinance, this would include entry-level loan officers.) Some leaders argued that junior staff: (a) were much more motivated by additional cash than stock options; (b) that giving something to employees which they didn’t value and cost the company something didn’t make sense; and (c) would develop expectations that the stock was worth something and if that didn’t materialize they would be angry. Other leaders argued that there are still very good reasons to offer stock options to entry-level employees and these above issues can be addressed through education and setting up share sale opportunities back to the company … with the goal of giving some significant upside sharing to these employees.

How to avoid mission drift. I was asked by one of the CEOs what I recommended they do to ensure that an organization continued on it’s social mission once outside investors got involved. After first stating that I felt like I was the least qualified person in the room to answer that question, I shared an observation … investors are first and foremost investing in the capabilities and potential of the executive team to deliver the results promised during the fundraising process. This means that the social business CEO has a LOT of power. You have the power to set very clear mission and performance measurements with your investor upfront. So, use that power to be very clear in setting expectations about what success looks like. And then make sure your investors are aligned with these objectives.

Please share additional examples in comments of creative approaches that social businesses are taking to share the wealth created when/if their business is successful.

Distributing wealth created by social businesses

September 27th, 2008

There are an increasing number of social businesses which have the opportunity to have both dramatic positive social impact as well as significant generation of wealth. What I’m referring to are what I call “hybrid social businesses” … those which have objectives to deliver social impact and are structured as “for profit” shareholder-type entities. I have written previously that I think that one of the sectors with the most growth opportunity are businesses focused on the world’s poorest and how there is a growing debate on how the wealth created by businesses like Compartamos are distributed.

What I’d like to focus on here is the unearned investment income/assets rather than other wealth that’s created through employee compensation, cash philanthropy gifts of the business, taxes paid and wealth created by customers of business based on the business’ products/services.

Who should benefit from the wealth created by businesses serving the world’s poor?

Of course, there is not one right answer to this question. Here’s a short list of the constituents who could benefit:

  • Investors
  • Business founders
  • Business management team
  • Employees
  • Clients/Customers
  • Local Communities

In most situations, unless specific attention is given, the primary stockholders of any business are the investors, the business founders and the business senior management team. It is important that investors are compensated for the often high-risk capital they provide to fuel the business for without this the business wouldn’t exist. The founders also need to be compensated for the significant vision and sweat equity they have invested in this venture as well as likely other failed ventures (see my overview of hybrid social business for more details). And to attract the right growth-capable senior operating managers, they also need to be allowed to participate in the wealth they are leading the creation of.

Is this where wealth sharing should end?

If this is where the wealth-sharing ends, then the result is likely to increase the wealth share of “the few” creating higher societal wealth inequity. Since most of the countries where the highest potential social businesses are operating already have very high societal wealth inequity, this is perpetuating a severe concentration of wealth. Many people believe that the best approach to creating better societies is to encourage the creation of a very sizable middle class which results in many benefits including more accountable government, fairer laws/judiciary, more resilience to economic changes/shocks, increased freedoms/human rights and less violent communities.

The coming scrutiny

I think that this is going to be an increasingly important issue to address as there is going to be increasing scrutiny of “excessive profits” earned by “the few” which are “generated from the pocketbooks of the poor” by populist governments and political parties/candidates. This is an easy “outrageous” story to sell for votes. So, it is wise to get ahead of this issue.

Going further in wealth sharing

I believe there are opportunities to structure social businesses in order to both generously reward investors, founders and managers AND create wealth for other important constituents. Here are a few thoughts:

  • Employees could have the opportunity to participate in the company’s success. There has been phenomenal wealth generated through employee participation in stock programs in many companies in the developed world. Of course, this has its risks (as we’ve seen with mismanaged companies like Bear Stearns), but there are many more examples of where this has benefited employees modestly or substantially.
  • For certain kinds of businesses it might make sense for poor clients/customers to also have a method to participate in the value being created. This is being done with some microfinance institutions where the clients earn or purchase shares in the company. This has to be structured right though to create a workable governance model. Grameen Bank has done this with board representatives elected by their bank clients. SKS Microfinance has setup a trust to oversee a substantial number of shares owned by their clients.
  • The local communities where a social business works are also a consideration for participating in the wealth created. [I’m not talking here about the common 1-2% of profits given philanthropically by many companies, but rather the enterprise value created.] Since most communities where these social business operate have huge common good investment needs, there is an argument to be made that a success social business could provide significant capital to at least bootstrap these community investments.
  • When a social business receives donation dollars or subsidized capital, there is an increased responsibility to share the wealth generated more broadly.

All of these new “shareholder” groups introduce more complicated governance issues. Some argue if that if you let these less educated shareholders “vote” that this will create problems for the business down the road. In response to this, some social businesses with substantial share ownership with these constituents appoint capable (and hopefully accountable) trustees to oversee the interests of these shareholders. So, yes, this creates more complexity, but then so does democracy!

I’m interested in hearing about examples of hybrid social businesses which are wrestling with the topic of wealth creation distribution and are experimenting with different models/approaches. Please post comments of examples.

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