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The Danger of Demonizing Profit Making Companies That Serve the Poor

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In only a few years, microfinance in India has morphed from being a savior of the poor to the whipping boy of the press, and a poster child of exploitation of the vulnerable. According to Indian politicians and many in the press, the exploitation has been led by profit-making companies which have quickly grown to dominate an industry once populated by nonprofits.

This controversy has rekindled the debate over what is better for the poor -- business or charity -- something that was debated by Muhammad Yunus, the founder of microfinance, and Vikram Akula, who recently took his for-profit microfinance institution public on the Bombay Stock Exchange. Fundamentally, the almost blanket depiction of for-profits as 'the bad guys' is doing a great disservice to the very people whom this message is intended to protect. The poor need for-profits serving them.

Here is why.

The poor are already consumers

There are roughly four billion people who earn less than $8 a day, otherwise known as the bottom-of-the-pyramid markets (BOP). Collectively, they spend USD $5 trillion per year, which, if it were a single economy, would be the third largest in the world behind the United States and China. That's nothing to sneeze at, so it is odd that a market of this size is often perceived to be the exclusive realm of charity. C.K. Prahalad, often thought of as one of the fathers of BOP markets, believed the poor deserve to be treated as consumers as "choice is where dignity starts." Jacqueline Novogratz, founder of the Acumen Fund which pioneered investments in businesses that serve the poor, notes "...we view truly low income individuals... as producers and consumers, rather than as passive recipients of charity."

The poor seem to agree with Prahalad and Novogratz. In 1999, the World Bank conducted a survey of 60,000 of the working poor across 50 countries and asked them (among other things) to identify the single most important thing they wanted. The answer overwhelmingly was better access to information and technology, not charity. The lead author of the survey, Deepa Narayan, explained that "poor people know that what keeps them poor is lack of competitiveness..."

The poor deserve attention from the best and brightest

The very poor spend almost all of their income on bare necessities which are overpriced, poor quality and often harmful to their health. The World Resources Institute terms this the BOP penalty -- essentially, the poor pay more for less because they are poor. Above all else, the BOP Penalty represents enormous market failure and presents incredible scope for entrepreneurs who are willing to think big and develop scalable business models. While there are clearly nonprofits with ambitious goals, the number of entrepreneurs thinking of reaching tens or even hundreds of millions of people tends to be significantly skewed in favor of for-profits. The world's poor needs these entrepreneurs focusing on solving their problems, not the latest generation of iPod.

The poor need investment from risk taking, profit seeking capital

It takes a lot of money, talent, and expertise to build a business capable of tackling a market with billions of potential customers. The resources that are required are almost exclusively available to for-profits which have sustainable business models and are able to eventually fund their own growth over time. Nonprofits are rarely able to match the growth trajectory of for-profits, particularly as their operations often rely on continued charitable support. Akula makes the need for growth capital in addressing the enormous BOP markets quite clear in an interview he gave to Forbes India:

"Grameen Bank reaches 7 million clients and that's amazing...[but] it ... took 35 years to do that... Can you imagine how many generations it will take to reach 150 million poor households in India if we took that approach? We have to scale more rapidly, and only commercial capital will meet our huge funding requirements."

Conclusion

It simply shouldn't matter whether a company serving the poor generates a profit and to ignore the important role for-profits can play in bringing the poor out of poverty is short sighted. As C.K. Prahalad notes, while there are certainly examples where for-profits have done harm to the poor,

"...the greatest harm ... is to ignore them altogether.. [because] ... the poor cannot participate in the benefits of globalization without an active engagement and without access to products and services that represent global quality standard."

The true issue here is not whether for-profits play an important role -- it should be clear that they do -- but rather how to encourage the right kind of for-profits to address the social needs of the poor, and what kinds of regulatory environments they should operate in.

Hugh Whalan is the CEO of Energy in Common, a non-profit which delivers packaged solutions to microfinance institutions so that they can profitably develop and expand micro-energy loans to the poor.