How the Mobile Phone Is Becoming a Wallet
Wednesday, December 12, 2007
The Credit Suisse Thought Leadership Conference 2007, organized by ISP for key clients, took place on November 20 in Zurich under the slogan “Entering the Next Level.” One of the speakers was Professor C. K. Prahalad from the University of Michigan, USA. In an interview he talked about microfinance and market potential at the bottom of the income pyramid.
Cornelia Stauffer: Why are you campaigning for the market at the bottom of the income pyramid?
Professor C. K. Prahalad: Until a few years ago, multinational companies primarily focused their efforts on the one billion people who live at the top of the global economic pyramid. The other 80 percent of the world?s population that formed the base of this pyramid were ignored. With my work I want to draw attention to these 4-5 billion people, the majority of whom survive on less than two dollars a day. They have purchasing power and offer large companies the opportunity to engage actively and profitably in the latent market at the bottom of the pyramid.
Credit Suisse has been engaged in microfinance since 2003. What do you think about microloans aimed at low-income customers?
Poverty has three causes: First, poor people do not have the same access to information on markets and prices as rich people. Second, there is a lack of access to products of world-class quality. And third, they do not have access to credit on reasonable terms. So microfinance plays a key role in combating one and may be two of these three problems. Microloans can enable families to improve their livelihoods.
What is your opinion about microcredit for small and medium-sized companies (SMEs) in emerging markets and at the bottom of the pyramid? The Credit Suisse Thought Leadership Conference 2007, organized by ISP for key clients, took place on November 20 in Zurich under the slogan “Entering the Next Level.” One of the speakers was Professor C. K. Prahalad from the University of Michigan, USA. In an interview he talked about microfinance and market potential at the bottom of the income pyramid.
Cornelia Stauffer: Why are you campaigning for the market at the bottom of the income pyramid?
Professor C. K. Prahalad: Until a few years ago, multinational companies primarily focused their efforts on the one billion people who live at the top of the global economic pyramid. The other 80 percent of the world?s population that formed the base of this pyramid were ignored. With my work I want to draw attention to these 4-5 billion people, the majority of whom survive on less than two dollars a day. They have purchasing power and offer large companies the opportunity to engage actively and profitably in the latent market at the bottom of the pyramid.
Credit Suisse has been engaged in microfinance since 2003. What do you think about microloans aimed at low-income customers?
Poverty has three causes: First, poor people do not have the same access to information on markets and prices as rich people. Second, there is a lack of access to products of world-class quality. And third, they do not have access to credit on reasonable terms. So microfinance plays a key role in combating one and may be two of these three problems. Microloans can enable families to improve their livelihoods.
What is your opinion about microcredit for small and medium-sized companies (SMEs) in emerging markets and at the bottom of the pyramid?
They are an investment in the future. The number of SMEs in all countries is significant – even in rich nations. So the real question is: Do these SMEs have access to high-quality financial services? In many countries this is not the case, and this is where there is a need to act. However, as most of these companies are family operations it can be difficult to get transparent accounts with which to undertake the necessary credit analysis. The banks need to develop new methods in the area of microfinance to analyze the creditworthiness of clients and to impose appropriate terms and conditions.
This can be done through peer group pressure rather than via the traditional collateral route. In India, for example, loans are made to self-help groups who then distribute the funds among their members.
How can a large bank contribute to breaking down the barriers that prevent access to financial infrastructures at the bottom of the pyramid?
Given their cost structures, large banks cannot operate on a local level. But this shouldn?t prevent any major bank from working with local community banks. Microloans can be provided with the assistance of local partners. The key is not to enter this market for reasons of compassion. It must be based on business criteria. What?s important is to seize the opportunity offered by the market. For example, it is estimated that migrants from developing countries send between 250 and 300 billion dollars every year in remittances back home to their countries of origin – an amount that exceeds the total aid donated annually to developing countries. This flow of funds – from the poor working in the developed world to the poor in their countries of origin – was not captured by the large global banks till recently.
Is there not a major risk involved in investing in developing countries?
No. Take the Grameen Bank in Bangladesh, a microfinance credit institution. The proportion of clients who do not meet their credit obligations amounts to less than 0.5 percent. Poor people are very grateful to the banks – because the alternative is private money lenders who demand horrendous rates of interest. The credit risk in this sphere is much lower than that posed by young credit-card owners in industrialized nations, for example. I believe, in many cases, the poor represent lower risk.
Where is microfinance already well established?
Bangladesh is a good example. Because of the pioneering work he did in Bangladesh, Muhammad Yunus, the founder of Grameen Bank, won the Nobel Prize. India has also developing an excellent and rapidly growing system involving different self-help groups, community banks, large banks, and non-government organizations.
What countries could present the banks with difficulties?
To be able to offer banking services, you need an effective legal system. So it?s very difficult if a country doesn?t have basic laws or cannot enforce these laws. Another crucial factor is a well-developed civil society. Without this kind of civil society, it?s difficult to reach the poor people in rural areas.
In your book “The Fortune at the Bottom of the Pyramid” you talk of a win-win situation in which both international companies and the world?s poor can benefit.
With this business model, people at the bottom of the pyramid gain access to microfinance and quality banking services. This allows them to raise their income, as they no longer have to pay the extortionate interest rates charged by private money lenders. But we also shouldn?t forget the technical advice they benefit from. For their part, the banks become involved with a new category of customers. This forces them to be innovative and to offer reasonably priced, advanced technology solutions. An example: A bank in India wanting to provide services to a predominantly illiterate rural community had to develop biometric devices to identify its clients.
Could this give rise to innovations in industrialized nations?
Absolutely. I can illustrate this with another example: In the majority of developed countries, it is not yet possible to carry out a financial transaction by SMS. But this technology already exists in the Philippines and is now being tested in India. The so-called “mobile banking” was developed by banks together with telecommunications providers and is aimed at people with low incomes.
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