Can Charity Work With A For-Profit Motive?
from the long-term-vs.-short-term dept
A few weeks back, the always excellent Planet Money podcast played parts of a debate held at the Clinton Global Initiative between famed microfinance guru Muhammad Yunus and successful microfinance entrepreneur Vikram Akula (moderated by Planet Money host Adam Davidson), considering whether or not a for-profit microfinance effort can really work in terms of enabling better financial opportunities for the poor. Yunus argued that a for-profit effort simply cannot do good. Since it has a profit motive and outside investors, its efforts will always be on transferring money away from the poor to those investors.Akula disagreed, strongly, by pointing out that you can align both of their interests, and his company appears to have successfully done so. In the talk, he gives an example of the fact that they only lend money to women and they charge well-below market interest rates. He also notes that, unlike most banks, they don't pay those in charge of lending the money based on how much money they lend out (or make). The idea there, is that they want the people there to figure out the right amount that the person needs, rather than creating incentives for them to try to get the person to take more, to make their own numbers look good.
Now, he argues that, compared to other banks, you could say that his firm, SKS Microfinance, is leaving money on the table, but he doesn't see it that way. The woman who takes out a small loan and successfully pays it back this time, can come back later, when the timing is appropriate and take out a larger loan, which might never have happened if she had been pushed into a bigger loan earlier, or charged much higher interest rates.
And, while no one specifically says it in the podcast, this is a much bigger point than Yunnus seems to recognize. There are two factors that Yunnus doesn't seem to consider in condemning all for-profit microfinance efforts: (1) this is a non-zero sum game and (2) this is a multi-round game (i.e., there's a long-term strategy horizon). Yunnus is right that for-profit charities probably can't work in a situation that is a zero sum game, or in which the time horizon is very short, such that there are unlikely to be repeat customers. But, just taking a straightforward game theory look at what Akula and SKS are seeing, they can increase the overall pie more efficiently in a for-profit setup. It's not "taking away" from the poor. It's expanding the overall economic pie for everyone, including investors, and part of the way that's done is by focusing on building strong relationships with those using the service. That means, the temptation to screw them over is tempered by the incentives to be fair to encourage that long-term relationship that pays off (for everyone) over the life of the relationship.
I have to admit that I was a bit disappointed in Yunus, who is so often held up as a financial genius for his microfinance theories. As the podcast makes clear, his focus involves heavy government involvement and regulation to create a special type of community-owned microfinance bank, which apparently works okay for the community he's in, in Bangladesh, but that doesn't mean that a for-profit microfinance operation can't help the poor quite a lot, while also helping investors.
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Filed Under: business models, charity, muhmmad yunus, profit, vikram akula
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A somewhat obvious nonsense ?!!!
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Re: I have to agree
It gets even better if you are supplying food to hungry children, because they get to apply a monetary value to the food donated and keep all the cash donated.
A lender that works in favor of the underprivileged is an intriguing idea though. On the surface it sounds like a great concept that would work until the banking industry felt it was a threat and then Congress would be lobbied for protection from the upstarts.
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Re: Re: I have to agree
I'd be surprised if any charity that didn't have managerial staff didn't operate on a volunteer basis.
It's also a shame that someone would be willing to profit from the donations intended to help people in need.
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Or are you just saying that working for charities is an occupation for losers and they should accept that and work for a non-competitive salary ?.
There may well be people working for charities that earn more than the average techdirt commenter, but that doesn't necessarily qualify as "raking it in".
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To take an illustrative example form commercial world. C-H Svanberg moved from CEO Telecoms (Ericsson) to Chairman in the Oil industry (BP). A lot more than $300k for salary, no previous industry experience, and his skill handling things for BP this summer has not received universal admiration.
From that perspective $300k for CEO of a big charity isn't particularly offensive (assuming it's being run reasonably efficiently).
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And yet it is. I still contend there are many people who would do that job well for much less, leaving the excess for the charity.
The prospective you seem to have lost is; that the people giving to that charity only see the good it can do the prospective clients. They do not (for the most part) agree to finance an executive life style, with company cars, expense accounts, assistants up the wazoo also pulling executive wages and benefits, + a golden parachute retirement package.
For my part I only give to local charities, where I actually meet the people doing the work. The nationals can do whatever they chose, just not with my money.
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Personally I like to support charities with more of an effective structure and more objective ways of assessing performance and efficiency.
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I do know about people who get into charity to get money out of it, they collect everything and get a fall guy to blame generally a desperate volunteer that is trying to help people/kids. The schemes I know of are really simple, people get donations from all over the world, get into the country the donations without taxes and sell everything the fall guy gets 10's of thousands of dollars and while the other guys pocket the million in donations that were made, this is done with the help of the police, politicians local and federal and some other people.
On a more elaborate scheme people use the tax brakes to evade taxes because in some places companies get a discount on taxes for work they do as charity so they inflate the numbers and again find a fall guy or institution to sign everything saying he got it.
There are bad actors in the area, not that this stop me from doing charity when possible it just shows that where there is money, there is also vultures involved, which some people try to hide/dismiss/ignore because it can affect legitimate charities also.
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"while also helping investors"
It's a pernicious LIE that society must be structured around an "investor" class. The poor have a *right* to fair rewards -- and fair opportunities, not starting miles behind those who inherit a bunch of numbers in a computer and are therefore somehow entitled to be in the "investor" class.
I think a better way of tackling injustice is to bring down The Rich. It's do-able, for one thing. The civilized way, which we may as well try, is steeply progressive income taxes (especially on UNEARNED income), and even higher estate taxes to limit the increase of inherited parasites.
Working, quite literally, within the system that The Rich have set up just isn't going to work. Think outside the slave collar.
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Re: "while also helping investors"
Idealism aside, you might not like the world you suggest creating, as much as you might think.
You may want to visit a rural part of a 3rd world country, where the people have done so much with so little for so long they attempt the impossible with nothing.
No hospitals, no decent roads or bridges, ETC.
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A different POV
Aren't just a for-profit business aimed a very specific, and in my opinion, underserved market?
Maybe some folks don't believe it, but a business doesn't have to be a charity to do positive things.
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Both strategies can work
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Hmmm...
Financial resolve does not equate to resolve to make a specific situation better. Those who invest in "charity" are not likely to stick around with their money when times get hard, and real Charity is needed the most.
Also, I find it hard to believe that investors would ever give great consideration to the preservation of the dignity of those needing charitable assistance.
For-profit charity... perhaps worth considering, but most likely an oxymoron.
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If I were an investor...
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Can Charity Work With A For-Profit Motive?
Just ask the FSF ('free' software federation).
They make millions a year and they are a 'charity', and what does your donation pay for.
It keeps Richard Stallman on a continuous holliday, travelling the world and being smelly.
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Interest rates: The Poisonous Fangs of MFIs
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