On Microfinance

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I worked for a microfinance organization, so it’s a little strange that I have not come around to talking about it yet, but a recent New York Times article touched on all of issues surrounding microfinance that I have been pondering.  So I guess its time for me to confront my opinions.

Microfinance has been hailed by Muhammad Yunus and many others as the elusive formula to improving the lot of the world’s poor.  It is thought that providing small loans to poor people will allow them to pull themselves out of poverty by virtue of no longer having working capital constraints on their entrepreneurial ventures.

One must first consider that lending to poor people is not, in and of itself, a novel idea.  People with capital have always been there to lend it to those who don’t have access to it, and to take profits off the top.  We called these people loan sharks, and have long stigmatized them in film.  They sit in dimly lit rooms and finance a protagonist at a time of desperation. Later, when the loan goes sour, they use violent methods of collection.

There are certainly these sorts of loan sharks out there, but that is not the whole story.  Some are just moneylenders, respected members of their communities, attempting to fill a capital gap because banks, the “formal” arbiters of small business finance, refused to lend in these communities.  The banks considered it too costly to reach these borrowers, and the interest to be earned off of their small balances, has not traditionally been worth the effort.

Enter microfinance.  It has always been an attempt to “formalize” the practice of small-scale lending, to provide safe and affordable access to capital to the segments of society forced to rely on predatory lenders.  And formalize they did.  MFIs simply institutionalized the practice of community lending that existed, which is why many people remain so skeptical.  The interest rates still appear predatory and there are still rumors of abusive collection practices.

The question of whether or not small loans, in and of themselves, can eradicate poverty is hotly debated.  After much internal debate, I have come to the conclusion that, financially speaking, it is simply not feasible.  Even the cheapest microfinance organization is lending at well above 20% APR and thus for this sort of small-scale entrepreneurship to be sustainable, microborrowers would have to be earning above that.  Now, imagine what Compartamos borrowers would have to earn.

But not even the largest, most efficient corporations in the world are capable of consistently earning returns like that – the market average is, at best, 10%.  If it were indeed the case that microentrepreneurs could consistently earn 30-130% on borrowed capital, we’d all be hawking handmade goods on the street and selling fish out of the back our cars, and you can be damn sure that banks would be lending to us.  This is why the interest rate question is so important, because if you can’t earn above the cost of borrowing, the only options are then deeper indebtedness (i.e. more microlending) or bankruptcy.

But I am still a huge proponent of microfinance.

The way I see it, microfinance is the stepping stone between the bottom of the pyramid and the true engine of wealth building, savings.  Microfinance has introduced millions to formal financial services, and as MFIs struggling to become self-sufficient have turned to collecting deposits, they are introducing people to the real consumer benefits of banking, saving.

In the future, we will see that MFIs simply laid down the distribution channels, proving that the poor demanded financial services and that they could be reached affordably – that was the true innovation. And as mobile technology and other innovations bring down the cost of banking to the poor, the logical conclusion of the story, like it or not, will be the transformation or consolidation of MFIs into the traditional banks.  MFIs may survive as full-time distributors, selling loans and receivables between banks and borrowers, but the net effect will be the same, JP Morgan and co. trolling around the bottom of the pyramid.

The reason this scares people is that they think banks will profiteer off of the poor.  But one should remember that banks are heavily regulated with respect to the interest rates they can charge; the same cannot be said for all MFIs, especially non-profit ones.  If there is any reason that banks and MFIs can get away with charging exhorbitant interest rates, it is because the local usury laws permit it.

This is not a question of greed and profit margins.  It is a question of democracy, the will of the people and the rule of law.  It is about what interest rates we as a society are willing to accept.

At the end of the day, if we get the laws right, we will have expanded access to financial services to all corners of the globe, with regulated lending and the opportunity to save open to all.

And isn’t that what we truly want?  Because think about it: if the end of this story is not about savings, are we not just creating another generation of debt-addicted citizens?  Are we not just blowing up another lending bubble?

[The caveat of all this, of course, is financial literacy and how  well we educate ourselves on the responsible use of financial services.  This is not limited to the poor.  It should be a mandated part of high school curriculum for all]

Posted on April 14th 2010 in ideas, news

Think Social, Drink Local

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I was asked to put together this promo for Think Social, Drink Local 2010, NYU Stern‘s hottest party of the year, hosted by the Social Enterprise Association:

This year’s party is Friday, March 5th at the historic Altman Building.  It features four hours of open bar provided by local and eco spirit sponsors, raffles and giveaways donated by local social entrepreneurs, and an eco-fashion show outfitted by local sustainable designers.

Be sure to check out all the sponsors:

  • Crop Organic Vodka offers USDA Certified Organic, artisanal (like cucumber) vodkas
  • Brooklyn Brewery, NYC’s biggest local brewer, currently has 16 different beers
  • c. marchuska makes chic and sustainable clothing at affordable prices
  • Garbage of Eden ‘upcycles’ plastics from around New York City to design accessories
  • Recession Rags opts against producing new cloth and forages the city’s garment districts looking for unused vintage fabrics
  • Posture Magnetic makes quality design using sustainable methods of production and transportation
  • Alternative Apparel employs strict ethical labor and environmental guidelines for choosing vendors throughout the supply chain
  • Indego Africa returns 100% of profits from sales of Fair Trade handicrafts to its artisan partners AND invests in long-term skills development
  • Mociun delivers sustainable jewelry
  • Tribal Societe sources jewelry and clothing from artisans throughout the developing world, and donates a portion of sales to the Global Fund for Women
  • Edun is building a community-based value chain in the production of its clothing, with a focus on Africa
  • Green Apple Cleaners dry cleans using Liquid CO2, a method that is highly regarded as the most benign to human health and the environment
  • Green Map provides a collaborative mapmaking platform to let communities around the world promote their local sustainability
  • Peeled Snacks uses only high-quality natural and organic ingredients in its fruit and nut snacks, available in many stores.  You may have seen them at Starbucks
  • Nunu Chocolates makes totally natural, handmade-to-order chocolates out of Brooklyn

Posted on February 16th 2010 in events, OrgWatch

OrgWatch: Project H Design makes design matter

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On the Colbert Report, Emily Pilloton of Project H Design explains how her organization aims to create genuine social impact through humanitarian design.

The Colbert Report Mon – Thurs 11:30pm / 10:30c
Emily Pilloton
Colbert Report Full Episodes Political Humor Economy

I’m such a sucker for this kind of stuff.  It’s probably my inner-architect, whom I exiled during college, trying to squeeze back in.

The grand irony is that I quit my pursuit of architecture because I felt that there was not enough potential to create genuine impact through design alone.  In retrospect, it seems surprising to me that it went down like that, because I went to a very Modernist school, where “form follows function” was the law of the land.

I’m just glad that so many others have found ways to put their skills to good use.

Posted on January 28th 2010 in Artful Impact, OrgWatch

The awesome power of markets, ctd.

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As mentioned, I think the power of markets holds some potential for the public and social sectors.  Imagine.  Could a mechanism exist whereby funders, taxpayers and investors could assess the potential impact of an organization or program in real time and reflect the value and potential of that impact immediately?  Could there be a social stock market?

Durreen Shahnaz seems to think so.  She has tested many waters in her career, which includes time at Grameen Bank, the World Bank and Morgan Stanley, and now is the Head of the Programme on Social Innovation and Change at the Lee Kuan Yew School of Public Policy in Singapore.

Today, Shahnaz aims to develop an Asian social stock exchange.  According to her:

It is a stock market where investors who care about social and economic returns buy stocks and bonds of companies that have strong economic and social returns. Interestingly, in a social stock exchange both not-for-profit and for-profit companies can participate. For-profit entities can either issue shares representing ownership in their companies or issue bonds. Meanwhile not-for-profit companies can utilise the stock exchange to issue bonds an action in itself that can bring operational accountability to the not-for-profit sector (as opposed to carte blanch donations from foundations).

It is quite a compelling idea, and many iterations exist.  In Europe, there is the FTSE4Good, which measures the performance of companies that meet globally recognized responsibility standards.  The Canadian-based Green Stock Exchange allows trading in companies the exchange has deemed as promoting environmental sustainability.

There are still links missing between these models and the ideal.  The companies on these exchanges are pre-screened and, once listed, the investment criteria becomes the same old financial returns.  There is no opportunity to assess social impact in real-time and use it to make investment decisions.  It lacks that responsiveness that makes financial markets so powerful, that lets them weed out those who can’t deliver.  Investors must accept the potential for social impact from the assumed wisdom of the exchange gatekeepers.

And when the metrics are only financial, there is still that sticky problem of what to do when the solution has no price.  The impact may not be quantifiable in the company’s potential profits and we miss out on the chance to fund some good.

Brazil’s BOVESPA Environmental and Social Investment Exchange has thought of an alternative model.  They merely mimic the idea of a stock exchange, but attempt to replace financial metrics with social ones.  The listings are purely NGOs and funders can follow the impact and adjust their “investments” accordingly.

I like this, but why can’t we have the best of all worlds?  If the Benevolent Barons of the world want double- and triple-bottom line companies, then why can’t the social stock exchanges have two or three lines instead of one?

I can see it: an exchange with multiple lines, side-by-side, measuring the gains and losses in both social and financial terms.  We could then even run correlations, and have some empirical data on whether or not profit comes at the expense of social impact, and vice versa.  And if the thought of drawing conclusions from more than one metric (egads!) drives you into convulsions, there is no reason we can’t compress it into a single line that simply places weights on each component based on where the financier falls on the spectrum of socially-driven to commercially-driven investor.

That’ll do just fine for what I have in mind.  Any takers or makers?

Posted on January 19th 2010 in ideas

On names, and their ideals

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You would think that at some point during the five or so years I begged my parents to get me a dog, I would’ve had some name ideas stored up for the day they inevitably caved in.  But when I finally brought my 12-week old yellow labrador home, I had nothing.  After nearly two days, I settled on Ruby at my sister’s suggestion.  I had no idea that she had drawn the name from ABC‘s General Hospital, the soap opera she had gotten hooked on in those lazy summer days of high school.  As wikipedia informs me, Ruby’s character was a prostitute that, having grown too old for her profession, settled near family in Port Charles, opened a diner and grew to be “by far one of the kindest characters on the show.”

Some things draw inspiration and character from their names.  Others are named in the hope of creating some sort of ideal for which the thing might live up to.  Ruby did have a tendency to hump anything in sight, though we surely did not intend for her to develop such habits when we named her after a fictional prostitute.  She did, however, after many reckless years of running around on the streets, grow into the one of the kindest dogs ever.

Like Ruby, the idea of this blog existed long before its name.  I lingered a while before settling on the Benevolent Baron, which also like Ruby, came to me long before I ever pondered its origin, a mashup of the ideal of the benevolent dictator and the industrial revolution-era demagogues known as the robber barons.  As I think about it now, I am forced to reflect upon the ideal that it represents.

I thought of the robber barons because they conjured up an image of fervor to me, one of success at any and all costs.  I had hoped to capture and nurture that fervor in the pursuit of social and economic justice, not just rational self-interest.

And so I thought of the benevolent dictator, the ideal that we Western liberals created in our minds and placed aside for those days when we are particularly estranged with the slow, partisan, bureaucratic, political and sacrificial nature of representative democratic governance.  It is the image of an omniscient leader who, armed with perfect information and a proper conception of public interest, cuts through all of the bullshit and manages the books, solves problems and serves the people.

And so the Benevolent Baron came into existence, meant to be seen as an individual, armed with perfect information – about what social programs create genuine impact, about what benefits outweigh what costs, about the equity-efficiency trade-off – who could cut through all of the bullshit of politics, fundraising and data manipulation and serve the people with Carnegie-style greed.

The name, of course, is nothing more than an ideal, like equilibrium pricing or the efficient market hypothesis, or the first post I wrote in 2008 when I came up with it.  The ideal is difficult to fathom; there are too many uncertainties, too many tradeoffs, too many transactions costs, too many sticky things.  But it is an ideal worth looking up to.

The name may represent an ideal, but named things often have a stubborn capacity to evolve on their own, despite the namer’s best intentions.  I hold no illusions that the ideal can become real, or that this blog will always strike a harmonious balance between profit and welfare.  I can only wait and see what this thing grows up to be.  Hopefully it won’t prostitute it’s ideal for a little wealth.  And hopefully it won’t be too kind to those with good intentions but poor outcomes.

Somewhere in the middle there is a treat for humanity.  It’s time to go fetch it.

Posted on January 12th 2010 in ideas

Benevolent Thoughts

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It’s time to see what this is all about.  I am a Benevolent Baron, he who seeks to harness the power of the market to bring sustainable social good.  He, who is at once a capitalist and a socialist; individualist yet public servant; an entrepreneur, yet I have my boss: Humanity.

At the turn of the 20th century, there were men who changed the face of the world.  JP Morgan monopolized markets and fattened his pockets.  John D. Rockefeller amassed a personal fortune to rival gods.  They pursued personal gain with a fervor unknown in previous eras, with a disregard for public welfare unfathomable in democratic society.  They were the robber barons, and they won.

In the new century, the Benevolent Baron marches into the fray, infused with a similar greed, though not for money.  Not for fame.  But for social and economic justice for all.

The Benevolent Baron seeks to integrate capitalist ideas into the public and social sectors.  To ensure that aid organizations maximize the social returns on their investments.  To found businesses that solve human problems.  To tear down the ruthless ethic that has left far too many behind in the race for survival and joy.  To redefine the bottom line.

The robber barons eyed the bottom line as if it were an EKG on their own lives.  They rose and fell with the schizophrenic swoops of the market.  Yet the success and failure implicit in that bottom line has been of one measure, the easiest and most universal to mankind: numerical.  The Benevolent Baron embraces the numbers, yet applies a secondary measure.  A second bottom line, parallel to the first, measuring the social profit.

Admittedly, this is harder to measure.  Man became obsessed with cash only because it is so easy to count.  It is linear.  The second bottom line is multivariate, swaying from side to side, lurching upwards at times and falling freely at others.  Kicking and screaming, it struggles to break free from our traditional ideas about gains and losses.  It thrives in democratic debate, feeding off the individual moral and ethical codes of free thinkers.  The Benevolent Baron though has faith that the great equalizer that is the market can pin it down and chart it out.  We can redefine the bottom line.

Are you a Benevolent Baron?

Posted on August 7th 2008 in ideas
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