Interview: Stuart Hart on How Indian Microfinance Institutions Can Improve Their Negative Image

Tuesday, March 17, 2015

In the second part of his interview to the Chairman of Indian Council of Competitiveness, Amit Kapoor, global thinker and Founder and President of Enterprise for a Sustainable World, a non-profit organisation dedicated to helping businesses make the transition to sustainability, Stuart Hart talks about how Indian micro finance institutions can work towards cleaning their negative image.

How do you think the negative air around micro finance can get resolved? Are other financial mechanisms going to evolve for helping new entrepreneurs?
Micro-financiers who are promotional in character have now overreached and have created some negative air about them and in some cases have become extractive by charging useless rates. So, you get a push back on micro finance rates as there would always be players who would abuse the opportunity. But that does not undermine the importance of micro finance overall. It’s enormously important in building the craft businesses of the world. Micro finance is not a vehicle for building the promotional businesses of the future. That requires a different type of financing. India does not have the traditional venture capitalist structure as in the US. The traditional structure of VC in US does not do a good job of funding the kind of BOP sustainable enterprises that we are after.

These kinds of enterprises require time on the ground, capacity building, partnering and trust building in order to develop a viable value proposition. The traditional VC model out of California or Boston does not factor in the pioneer gap time. That VC model has a much shorter time clock and many of them have been involved in several ventures. The traditional VC does not have the patience to wait for 3-4 years for creation of a trust based value proposition in business model.

So, what we are seeing is the beginning of impact investing and I would say India is the epicenter of impact investing. The impact investing space is now like the Wild West in that it’s the whole spectrum, people who would ideologically think that in order to get the investment we need in social businesses we have to eliminate the capitalistic incentive. We have this whole new innovative financing space where you have financers playing with different models and it is not clear which one of them work the best. In order to promote tomorrow’s sustainable BOP promotional enterprises there has to be market returns that are not going to trap the investment capital you need to create the scale necessary to build the impact. There is not enough philanthropy capital in the world, there is some, to do social businesses, but there isn’t enough to get to the level of investment that we are going to need for the impact or the transformation that we want.

I think we have to figure out how we can have the market returns and at the same time lift the poor, generate opportunities, build capacity, generate livelihoods, make market returns, and leap frog to the future technologically. That’s when I will call the BOP enterprise, green leap. That’s where the big opportunity lies in the next decade. It is relatively easy to start small local enterprises with 0-return on capital. The thing that takes the most creativity is how do you simultaneously converge disruptive leap frog technologies and inclusive business models that lift the poor and generate market returns at the same time.

How do you react to people who are in the business of exploiting the poor?
It would be a clinically correct statement to say that if your job is to provide aid and there is less and less need for aid then fewer people are going to work in that space so that there may be perverse incentives built into that system. If you flip it over and look at it from an entrepreneur’s lens then the reverse is true. From a business point of view it’s in the business person’s interest to make more and more people less poor because then you can migrate people up the value chain further. Not only you can expand business opportunity but they also become prospective customers for a broader range of products and some would be considered up-market over time. The only way that happens is to alleviate their income levels.

Source: Business Insider (link opens in a new window)

Categories
Entrepreneurship
Tags
entrepreneurship, microfinance, nonprofit