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

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  1. icon
    James Carmichael (profile), 26 Oct 2010 @ 6:43am

    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.

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