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Profit And Poverty: Why It Matters
Through the ages, we have come to associate profit with greed and serving the poor with self-sacrifice. Accordingly, now that the outstanding performance of leading microfinance banks has inserted banking at the base of the pyramid as an integral part of emerging-markets finance, socially conscious investors are starting to agonize over earning returns while serving the poor. By focusing on their motivations in helping the poor rather than on poverty itself, they have obscured the pragmatic realities of the problem they wish to address.

Any intervention that seeks to meaningfully roll back poverty--whether it is microfinance, education, primary health care, housing or access to basic services such as water and energy--must fulfill four basic conditions.

The first is scale. When there are three billion people surviving on $2 or less a day, reaching a few thousand is like aspirin in the face of a raging cancer. The second is permanence, an assurance that the intervention will be present not only for today's poor but for their children and their children's children. In turn, this requires that the intervention outlast the finite lives of its current champions. The third is continuous efficacy, the ability of the intervention to become better and better through time. The fourth is continuous efficiency, the capability of the intervention to become cheaper and cheaper with each passing day.

Yet all along, the traditional first responders to this crisis have been structurally unable to deliver these four attributes. This may have much to do with the intractability of poverty despite the historic levels of time, treasure and talent that the world has thrown at it since World War II. At their best, nonprofit organizations and philanthropy give birth to and nurture ideas that can change the world. Development agencies allow these ideas to be tested in the field. But none of these are structurally designed for scale or permanence. As a result, they have often sought to ally with government. But while the public sector can deliver wide outreach, and sometimes sustain it for more than one electoral period, the state fails dismally as a guarantor of continuous efficacy and efficiency.

In fact, humanity has found only one way to deliver consistently and simultaneously the four attributes of scale, permanence, efficacy and efficiency, and it is through private enterprise. This is the result not of any single firm--individual enterprises are born, prosper and die--but of the emergence of an entire industry. And industries are born out of the union of two factors: an economic activity and above-average returns.

The impact of this on poverty is revolutionary. Since microfinance became credibly profitable in the early 1990s, it has been able to access capital markets, first as borrowers and later as issuers of debt and as regulated financial intermediaries. No longer funds-constrained, the number of poor people reached and the volume of capital disbursed has exploded.

Like in any other industry, it is high returns that attract competition. And competition is what ensures that the benefits of this growth flow not only to investors but to the ultimate end-user. The lowest interest rates, the widest array of financial products and the best customer service for the poor in Latin America can be found in Bolivia, where the native chola with her 10 skirts and tilted bowler hat has gone from an invisible to a sought-after client of world-class microfinance institutions, all with higher ROAs and ROEs than the average conventional bank. The outstanding returns of Banco Compartamos and the success of its IPO has ensured that this process will soon occur in Mexico.

So if you want to put your money in microfinance just to feel good, by all means direct it to the organization that most pulls your heartstrings. But if your objective is to roll back poverty and change the world, don't believe those that have been telling you that returns on your investment are the icing on the cake. It is the cake itself.

Michael Chu is a senior lecturer at Harvard Business School, former CEO of the microfinance organization ACCION and a founding partner of Pegasus Capital, a private-equity firm focused on providing venture capital in Latin America. 
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