Can Charity Work With A For-Profit Motive?
from the long-term-vs.-short-term dept
A few weeks back, the always excellent Planet Money podcast played parts of a debate held at the Clinton Global Initiative between famed microfinance guru Muhammad Yunus and successful microfinance entrepreneur Vikram Akula (moderated by Planet Money host Adam Davidson), considering whether or not a for-profit microfinance effort can really work in terms of enabling better financial opportunities for the poor. Yunus argued that a for-profit effort simply cannot do good. Since it has a profit motive and outside investors, its efforts will always be on transferring money away from the poor to those investors.
Akula disagreed, strongly, by pointing out that you can align both of their interests, and his company appears to have successfully done so. In the talk, he gives an example of the fact that they only lend money to women and they charge well-below market interest rates. He also notes that, unlike most banks, they don’t pay those in charge of lending the money based on how much money they lend out (or make). The idea there, is that they want the people there to figure out the right amount that the person needs, rather than creating incentives for them to try to get the person to take more, to make their own numbers look good.
Now, he argues that, compared to other banks, you could say that his firm, SKS Microfinance, is leaving money on the table, but he doesn’t see it that way. The woman who takes out a small loan and successfully pays it back this time, can come back later, when the timing is appropriate and take out a larger loan, which might never have happened if she had been pushed into a bigger loan earlier, or charged much higher interest rates.
And, while no one specifically says it in the podcast, this is a much bigger point than Yunnus seems to recognize. There are two factors that Yunnus doesn’t seem to consider in condemning all for-profit microfinance efforts: (1) this is a non-zero sum game and (2) this is a multi-round game (i.e., there’s a long-term strategy horizon). Yunnus is right that for-profit charities probably can’t work in a situation that is a zero sum game, or in which the time horizon is very short, such that there are unlikely to be repeat customers. But, just taking a straightforward game theory look at what Akula and SKS are seeing, they can increase the overall pie more efficiently in a for-profit setup. It’s not “taking away” from the poor. It’s expanding the overall economic pie for everyone, including investors, and part of the way that’s done is by focusing on building strong relationships with those using the service. That means, the temptation to screw them over is tempered by the incentives to be fair to encourage that long-term relationship that pays off (for everyone) over the life of the relationship.
I have to admit that I was a bit disappointed in Yunus, who is so often held up as a financial genius for his microfinance theories. As the podcast makes clear, his focus involves heavy government involvement and regulation to create a special type of community-owned microfinance bank, which apparently works okay for the community he’s in, in Bangladesh, but that doesn’t mean that a for-profit microfinance operation can’t help the poor quite a lot, while also helping investors.
Filed Under: business models, charity, muhmmad yunus, profit, vikram akula
Comments on “Can Charity Work With A For-Profit Motive?”
“(1) this is a non-zero sum game…”
A somewhat obvious nonsense ?!!!
Re: Re:
Mike points out there are multiple rounds; even though profits are being made and paid for by the borrower that’s not a zero sum because they might do it again .. and again ..
“Charity” organizations already provide huge profits, in the form of “salaries”. It’s sickening because they claim they are non-profit, yet they are raking in the dough as individuals, and it’s not the company that is making profit.
Re: I have to agree
I’m going to have to agree with the AC. I thought charities were already “for profit”. I understand the point being made, but in the US, I believe that “charities” are allowed to keep up to 80% of the cash they bring in as operating capital (i.e. rent, utilities, SALARIES).
It gets even better if you are supplying food to hungry children, because they get to apply a monetary value to the food donated and keep all the cash donated.
A lender that works in favor of the underprivileged is an intriguing idea though. On the surface it sounds like a great concept that would work until the banking industry felt it was a threat and then Congress would be lobbied for protection from the upstarts.
Re: Re: I have to agree
This is a problem in some charities, but not all charities are like this. In the local charities I’ve been involved with, it was 100% volunteer with everyone donating time, money, or food.
I’d be surprised if any charity that didn’t have managerial staff didn’t operate on a volunteer basis.
It’s also a shame that someone would be willing to profit from the donations intended to help people in need.
Re: Re:
What exactly is your problem ? – would you prefer to give only to inefficient and disorganized charities that operate on a strictly amateur basis ?.
Or are you just saying that working for charities is an occupation for losers and they should accept that and work for a non-competitive salary ?.
There may well be people working for charities that earn more than the average techdirt commenter, but that doesn’t necessarily qualify as “raking it in”.
Re: Re: Re:
There is no reason for a $300k salary for the head of a charity. I’d have no problem with less than $100k, but you can’t tell me that no one with acceptable credentials would run a charity for that kind of money. Highly qualified leader types are out there flipping burgers for minimum wage, just to have a job.
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$300k may seem like a to you (it does to me), but if you are talking about running a major international charity then that it probably low compared to the salary for the corresponding role (similar skill level) at a non-charity venture.
To take an illustrative example form commercial world. C-H Svanberg moved from CEO Telecoms (Ericsson) to Chairman in the Oil industry (BP). A lot more than $300k for salary, no previous industry experience, and his skill handling things for BP this summer has not received universal admiration.
From that perspective $300k for CEO of a big charity isn’t particularly offensive (assuming it’s being run reasonably efficiently).
Re: Re: Re:2 Re:
“From that perspective $300k for CEO of a big charity isn’t particularly offensive “
And yet it is. I still contend there are many people who would do that job well for much less, leaving the excess for the charity.
The prospective you seem to have lost is; that the people giving to that charity only see the good it can do the prospective clients. They do not (for the most part) agree to finance an executive life style, with company cars, expense accounts, assistants up the wazoo also pulling executive wages and benefits, + a golden parachute retirement package.
For my part I only give to local charities, where I actually meet the people doing the work. The nationals can do whatever they chose, just not with my money.
Re: Re: Re:3 Re:
Actually $300k doesn’t buy much of an executive lifestyle in the US, and meeting the people doing the work means they are all local or else wasting a lot of time and money traveling around rather than doing the work.
Personally I like to support charities with more of an effective structure and more objective ways of assessing performance and efficiency.
Charities as all endeavors need somebody to watch over it.
I do know about people who get into charity to get money out of it, they collect everything and get a fall guy to blame generally a desperate volunteer that is trying to help people/kids. The schemes I know of are really simple, people get donations from all over the world, get into the country the donations without taxes and sell everything the fall guy gets 10’s of thousands of dollars and while the other guys pocket the million in donations that were made, this is done with the help of the police, politicians local and federal and some other people.
On a more elaborate scheme people use the tax brakes to evade taxes because in some places companies get a discount on taxes for work they do as charity so they inflate the numbers and again find a fall guy or institution to sign everything saying he got it.
There are bad actors in the area, not that this stop me from doing charity when possible it just shows that where there is money, there is also vultures involved, which some people try to hide/dismiss/ignore because it can affect legitimate charities also.
"while also helping investors"
You know, I begin to wonder why “investors” don’t just help themselves, if it’s so desirable and fulfilling. Instead, they rely on labor by the poor for *everything*.
It’s a pernicious LIE that society must be structured around an “investor” class. The poor have a *right* to fair rewards — and fair opportunities, not starting miles behind those who inherit a bunch of numbers in a computer and are therefore somehow entitled to be in the “investor” class.
I think a better way of tackling injustice is to bring down The Rich. It’s do-able, for one thing. The civilized way, which we may as well try, is steeply progressive income taxes (especially on UNEARNED income), and even higher estate taxes to limit the increase of inherited parasites.
Working, quite literally, within the system that The Rich have set up just isn’t going to work. Think outside the slave collar.
Re: "while also helping investors"
Tax the rich feed to poor til there are no rich no more.
Idealism aside, you might not like the world you suggest creating, as much as you might think.
You may want to visit a rural part of a 3rd world country, where the people have done so much with so little for so long they attempt the impossible with nothing.
No hospitals, no decent roads or bridges, ETC.
A different POV
Maybe it’s just a semantic difference, but even if they’ve defined themselves that way, I’ve never thought of microfinance providers as charities.
Aren’t just a for-profit business aimed a very specific, and in my opinion, underserved market?
Maybe some folks don’t believe it, but a business doesn’t have to be a charity to do positive things.
Both strategies can work
Reminds me of the abortion debate. Just because a particular strategy works for you doesn’t mean that doing something different (or even completely opposite) won’t work. That’s true of many business strategies… there is rarely just one way to do things.
Hmmm...
I appreciate the realities involved in maintaining any kind of service, but I think approaching a problem from the perspective of potential returns invites financially driven policy without regard to the service or “customers” involved. We see this in the management of fairly all public companies today. In my opinion, the “increasing returns or bust” investment outlook drives many of the anti-consumer moves we see by companies today.
Financial resolve does not equate to resolve to make a specific situation better. Those who invest in “charity” are not likely to stick around with their money when times get hard, and real Charity is needed the most.
Also, I find it hard to believe that investors would ever give great consideration to the preservation of the dignity of those needing charitable assistance.
For-profit charity… perhaps worth considering, but most likely an oxymoron.
If I were an investor...
and I found that they were not maximizing returns on my investment, I’d sue the living daylights out of them.
Can Charity Work With A For-Profit Motive?
Yes, Ofcourse it can.
Just ask the FSF (‘free’ software federation).
They make millions a year and they are a ‘charity’, and what does your donation pay for.
It keeps Richard Stallman on a continuous holliday, travelling the world and being smelly.
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 lifter 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 microfinance 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 miniscule 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!
Read More: http://devconsultgroup.blogspot.com/2010/10/whats-wrong-with-micro-finance.html