Friday, March 26, 2010

The Madura Experiment

Madura is a for-profit social enterprise whose core business is providing small unsecured loans to the poor. In India and around the world microfinance is very much an evolving sector. Today microfinance is practiced either for-profit or not-for-profit, each with its own unique drivers.

The prevalent for-profit approach is scale focused and profit driven. In this model the goal is to create a streamlined process for the disbursement and collection of loans that allows loans to be pushed out as rapidly as possible. Interest rates for this model generally range between 25 to 40% in India today. This is profitable business. Unfortunately it has also been widely publicized and hyped as a path out of poverty. On the positive side, it provides a conduit for more fund flow into the ‘subsistence’ economy and over time competition will result in innovations to reduce the cost of capital, and interest rates will come down. However, the social benefits are not sufficiently large or even noticeable from the outside and the social impact has been vociferously debated. In the quest for rapid growth, as people start getting multiple loan offers, a number of people who never wanted to go into debt find themselves in debt. Think of it like the temptation of getting multiple preapproved credit card offers. Yet this is not why microfinance has failed to have substantial socioeconomic impact. Rather it is because with poor knowledge levels and very limited exposure to markets and market opportunities, borrowers are not in a position to make productive and innovative use of the loans. So here one must resort to showing and glorifying as success a woman who has taken a loan of $300 and now nets an additional $10 a month, if you don’t factor in the opportunity cost of her time and labour. Personally, I find this depressing.

The model generally practiced by non-profits takes a more holistic view of the borrower. Here, recognizing the disadvantaged conditions in which the poor operate, non-profits offer loans at low interest rates that are subsidized by grants and donations. Frequently they help the borrowers set up their businesses and market their products. The focus is on ‘enterprise creation’ and they become involved in every aspect. This approach has inherent limitations in its ability to scale. It is also implicitly paternalistic. To me it’s analogous to having a protectionist government where much of the industry is nationalized and subsidized. This breeds complacence and a lack of confidence. Those of us who remember India fifteen years ago, remember a nation that felt it held a secondary place on the global stage, a nation whose leaders assumed it could not compete on a global platform and closed its doors out of fear. But we have seen in urban India what liberalization can do. When the doors are opened, information and opportunities flow more freely and people who once thought that they could not rise to a global standard now find that they can. This is a systemic change that altered the paradigm in which we, its citizens, operate, the standard to which we are held, and slowly we all rise to it.

So at Madura we are embarking on a different journey that is socially motivated but profit driven. The for-profit aspect is extremely important from the point of view of accomplishing anything with scale. In the absence of profit it will eventually fizzle out or hit a limit in its transformative potential. However, this has to encompass more than just loans and its impact has to be systemic in nature. Our belief is that the poor are not very different in the way they will respond to opportunity. However, they have to be connected in a network in which information and knowledge flows more freely so that they more rapidly encounter opportunities. Today they encounter new information and form new links or relationships at a very slow rate. The challenge is to speed this up. The belief is that with the right network conditions, people will become more innovative and productive in their interactions and socioeconomic transformation will be a natural outcome of these interactions.

So where does this fit in with microfinance? Putting ideas into action needs money (most of the time) whereas money without ideas is just a piece of paper. Our strategy is thus based on the premise that if we have a network of credit enabled people sharing information and ideas, the network dynamics will work its magic. (What magic you might ask – I will talk about this in future posts).

We have thus embarked on a journey of building a monetizable information delivery network that, together with efficient delivery of finance, creates a strong growing business. The test, however, is how well we leverage this to turn it into something far beyond a business. Succeeding in the ultimate goal will require some clever understanding of the properties of the human network we are working with so that we can affect it as intelligently as possible. And that, I think, is the exciting challenge in this whole effort.

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