One often hears that a major constraint involved in the expansion of development activities is the lack of adequate finance. Some others also contend that it is the lack of business acumen and financial efficiency which restrict the spread of the good work done by the non-governmental organisations. A new phenomenon called Philanthrocapitalism addresses these concerns.
Recently, a lot of furore was generated in media when Bill Gates and Warren Buffet managed to convince 38 other billionaires to sign The Giving Pledge to give away at least half of their wealth during their lifetime or after their death for humanitarian causes. The article also stated that if the 400 richest Americans were to give away ½ of their assets, the charity would amount to nearly $ 600 billion. And it is this figure and the accompanying people’s voices which makes it an interesting piece of news.
The debate about Philanthrocapitalism as any debate runs along the similar lines of whether it is needed or not, whether it is good or bad.
Michael Edwards, who wrote ‘Small Change: Why Business won’t save the world’ entirely rejects the notion that applying business principles to solve global problems is more effective than the traditional approaches, stating that philanthrocapitalism will make the organisations ‘ignore the costs and tradeoffs involved’ in applying business approach to civil society actions and will ultimately undermine social transformation process, which doesn’t adher to deadlines and returns.
On the other hand, Mathew Bishop and Michael Green in their book, ‘How the Rich Can Save the World’ examine this notion from a more positive viewpoint. They cite the examples of various ‘social investors’ who are involved in how their money is utilized, who want accountability and efficiency as outcomes in the process of social change.
People on the other hand voiced entirely different kind of viewpoints; many even labelled it as a gimmick to garner publicity, to evade taxes, to increase social station. Nevertheless there were some interesting ideas which came out of these reactions.
Philanthrocapitalists like Bill Gates are concentrating their energies on the issues in third-world countries; however there are no. of problems in their respective countries as well. For example, the general concern in USA, which recently recovered from recession, seems to be the current lack of employment opportunities, a situation which many felt could be rectified if the corporates invested in business expansion rather than on donations.
Another idea was that though it is highly noble that capitalists are involved and promoting the notion of ‘effective charities’, they should work towards sustainable solutions arising out of their businesses. Increasing the productivity of poor through skill development and capacity building would help in reducing their dependencies on donations. The classic case of helping how to fish…
At the end of it, Philanthrocapitalism is still an evolving concept and judging its effectiveness is too early. However it can be said that this need not be a case of either/or, but can be seen as an opportunity to generate innovative solutions to reach out to the poor – integrate the efficiency of business with the social commitment of non-profits.
Tuesday, August 10, 2010
Friday, August 6, 2010
Engagement of For Profit Companies as Business Correspondents: Winners and Losers?
By Jatinder Handoo
Published in Microfinance Focus on August 6, 2010
The Reserve Bank of India (RBI) has recently put up a discussion paper in public space for engagement of “for profit” companies as business correspondents (BC) in India. This was on cards after a series of developments like August 2009 Working Group’s review of the BC guidelines which paved path for relaxing entry barriers for new entities and individuals as BCs. It also entailed provision of allowing banks to charge a “reasonable” user fee followed by Government’s acceptance of Inter Ministerial Group’s recommendations for use of mobile phones to further financial inclusion and now the latest one – Prime minister’s high power committee on financial inclusion which includes Industry captains from sectors like telcom, retail,BFSI,IT etc.
Finally, we have a 22 page document on the bank’s website cobbled up with familiar arguments for a business case to facilitate entry of “for profit corporate BCs” citing reasons like “risk mitigation and organizational capabilities” and “too big to fail” as pros and a few cons as well. But the conventional public policy reasoning reminds: “Behind every policy decision there are winners and losers”. I leave it to the wisdom of esteemed readers to find out the set of winners and losers in this case.
The paper shores up case for quashing entry barriers in favour of corporate BCs who would be either telcos or organized retail players (organized retailing in India is less than 2-3 percent in India) or “bankers to poor” NBFC –MFI . The pivotal argument put forth in the draft arrows that there is a paucity of organizational innovation and technology adoption by the existing players for furthering the “business of financial inclusion” in India, hence the entry of corporate BCs for speeding financial inclusion.
By mentioning this, does proponents find a technology and innovation vacuum in the current network of BCs? And thus expects “for profit corporate delivery channels” to employ these engines of commercial viability?. If this is the case, then it becomes interesting to foresee how would a for profit corporate channel solve commercial viability jigsaw on its own which is primarily the outcome of “low take up rates” of financial services and products at bottom of the pyramid; particularly when end customers have erratic cash flows and there are not enough better designed and properly priced micro banking products and services available which is the domain specialization of financial institutions and not telcos and retailers .
Commercial viability of the model as a factor is cited in the draft to buttress the case, but there are no pointers as to how “for profit” BCs will make the model commercially viable. Finally a global overview of Business Correspondents and need for adhering to principles of client protection is also touched upon despite of the fact that globally celebrated telco led model of M-Pesa is also largely a remittance service oriented and Safaricom makes no or extremely razor thin profits from this business stream. In Brazil BCs are in picture since 1970s, they are commercial entities but still more than 95 percent revenues are generated from checking accounts, utility bill payments and remittances and they have to cross subsidize their operations.
Finally, it is an open secret that the RBI despite of its herculean endeavors to go with bank led model at present seems to be under tremendous pressure from various quarters to accommodate corporate interests. Retailer-Telco-Technology interest groups and corporate lobbying at high echelons has taken the debate of financial inclusion beyond obvious.
It needs to be understood clearly that business of banking is of bankers and not of telcos or retailers. In the Indian context is visible on ground that the regulator has been proactive and Banks have demonstrated serious intentions and vision for enabling universal financial inclusion. However the missing link is investment gap. To fund the gap, policy can play a defining role here by incentivizing banks monetarily and this could be done by propounding a clear cut financial support policy for banks.
Non banking Players like retailers and telcos have along way to go in demonstrating some scalable and profitable models of micro banking for bottom billion junta. BC model is just on the verge of stabilization after four years. Let the existing system be incentivized without further experimentation and keep the debate on technology for future.
Published in Microfinance Focus on August 6, 2010
The Reserve Bank of India (RBI) has recently put up a discussion paper in public space for engagement of “for profit” companies as business correspondents (BC) in India. This was on cards after a series of developments like August 2009 Working Group’s review of the BC guidelines which paved path for relaxing entry barriers for new entities and individuals as BCs. It also entailed provision of allowing banks to charge a “reasonable” user fee followed by Government’s acceptance of Inter Ministerial Group’s recommendations for use of mobile phones to further financial inclusion and now the latest one – Prime minister’s high power committee on financial inclusion which includes Industry captains from sectors like telcom, retail,BFSI,IT etc.
Finally, we have a 22 page document on the bank’s website cobbled up with familiar arguments for a business case to facilitate entry of “for profit corporate BCs” citing reasons like “risk mitigation and organizational capabilities” and “too big to fail” as pros and a few cons as well. But the conventional public policy reasoning reminds: “Behind every policy decision there are winners and losers”. I leave it to the wisdom of esteemed readers to find out the set of winners and losers in this case.
The paper shores up case for quashing entry barriers in favour of corporate BCs who would be either telcos or organized retail players (organized retailing in India is less than 2-3 percent in India) or “bankers to poor” NBFC –MFI . The pivotal argument put forth in the draft arrows that there is a paucity of organizational innovation and technology adoption by the existing players for furthering the “business of financial inclusion” in India, hence the entry of corporate BCs for speeding financial inclusion.
By mentioning this, does proponents find a technology and innovation vacuum in the current network of BCs? And thus expects “for profit corporate delivery channels” to employ these engines of commercial viability?. If this is the case, then it becomes interesting to foresee how would a for profit corporate channel solve commercial viability jigsaw on its own which is primarily the outcome of “low take up rates” of financial services and products at bottom of the pyramid; particularly when end customers have erratic cash flows and there are not enough better designed and properly priced micro banking products and services available which is the domain specialization of financial institutions and not telcos and retailers .
Commercial viability of the model as a factor is cited in the draft to buttress the case, but there are no pointers as to how “for profit” BCs will make the model commercially viable. Finally a global overview of Business Correspondents and need for adhering to principles of client protection is also touched upon despite of the fact that globally celebrated telco led model of M-Pesa is also largely a remittance service oriented and Safaricom makes no or extremely razor thin profits from this business stream. In Brazil BCs are in picture since 1970s, they are commercial entities but still more than 95 percent revenues are generated from checking accounts, utility bill payments and remittances and they have to cross subsidize their operations.
Finally, it is an open secret that the RBI despite of its herculean endeavors to go with bank led model at present seems to be under tremendous pressure from various quarters to accommodate corporate interests. Retailer-Telco-Technology interest groups and corporate lobbying at high echelons has taken the debate of financial inclusion beyond obvious.
It needs to be understood clearly that business of banking is of bankers and not of telcos or retailers. In the Indian context is visible on ground that the regulator has been proactive and Banks have demonstrated serious intentions and vision for enabling universal financial inclusion. However the missing link is investment gap. To fund the gap, policy can play a defining role here by incentivizing banks monetarily and this could be done by propounding a clear cut financial support policy for banks.
Non banking Players like retailers and telcos have along way to go in demonstrating some scalable and profitable models of micro banking for bottom billion junta. BC model is just on the verge of stabilization after four years. Let the existing system be incentivized without further experimentation and keep the debate on technology for future.
Saturday, July 31, 2010
Remittances as a means towards financial inclusion
Much has been said about remittances and how they in some countries constitute the second largest component of external finance after foreign direct investments.
In economic and financial literature much attention has been paid to two important points namely (1) how remittances help meet shortfalls in finances in countries and (2) how financial inclusion is a means to an end – helping channel these remittances from abroad to intended recipients; most of whom are often poor and beyond the reach of normal banking channels.
Though true the emphasis on these two points tend to miss another very important point. How remittances are a means to achieving financial inclusion for all.
Not only do these remittances flowing in from abroad provide an incentive to bring greater segments of the population under the ambit of formal financial institutions and channels as there is sufficient revenue to be gained for banking and financial institutions from channeling remittances to these recipients but they also make it possible for the recipients to gain access to formal banking channels and networks that were until recently structurally at least out of their reach. the result of this is an improvement in the lending capacity of banks and credit institutions in these countries who with greater numbers of people using their service; primarily for savings; suddenly have greater volumes of credit in their possession ; significantly enhancing their lending capability. An added impetus is provided by national and international security considerations that look down upon informal channeling of money from abroad into domestic economies. Thus remittances by their very existence exert and demand pull to improve formal institutional coverage to unbanked and under-banked sections of society.
Under such scenarios remittances provide ample scope for “development” ; provided adequate policy is designed by governments and central banks to channelize the extra lending capability of formal financial institutions; through infrastructural and policy initiatives; to help bridge the gap currently existing between demand for credit and supply of credit for particular segments of society and regions that are lagging behind. Structural change in economies to put them on to an accelerated path of development is hence a very possible consequence if remittances and their externalities are successfully harnessed.
Tuesday, July 27, 2010
Need for sustainability in the quest for financial inclusion
A focus on “financial inclusion” has been there in India for quite some time now. If we look back we can see examples of policies aimed at financial inclusion at various instances in the past; most prominent amongst them being the policies that were enforced in the immediate aftermath of bank nationalization and in many subsequent policies even later. So if there existed policies for financial inclusion why it is that a vast segment of our population continue to remain outside the coverage of formal financial institutions and their products and services and continue to rely on informal sources of finances like moneylenders who charge exorbitant rates of interest.
Why it is that poverty characterizes vast tracts of rural India and people there aren’t able to use the ladder of access to alternative sources of finance to escape the clutches of poverty and the social and economic shackles that a poorly performing agricultural sector has imposed up on them. Why is it that large numbers of landless agricultural laborers AND farmers continue to be dependent on agriculture despite falling wages and incomes?
The answer to this is that though the architects of India’s poverty alleviation programs had their intentions right and realized that providing financial inclusion in the form of access to formal financial institutions and their services to the most impoverished segment of the population would help them to break away from their dependency on incomes from agriculture and also liberate them from the clutches of the moneylender (principally responsible for a large part of rural indebtedness); in implementation the “financial inclusion” did not go further than increasing the number of bank branches in rural India and emphasizing on credit requirements of the rural population; most of which again went to the land owning segments of the agricultural class who were able to muster sufficient collateral.
There was hardly any focus on providing the landless laborer with credit let alone other financial products and services including savings, insurance, etc. Thus the rural financial infrastructure that came about was quantitatively impressive but qualitatively poor.
What they forgot was that the approach towards making financial inclusion a reality needs to focus on perceiving the common man at the base of the pyramid not merely as a recipient of the financial services that institutions hand down but also as an important stake holder in the entire process; one for whom these products and services are a gateway to greater freedom from poverty and underdevelopment. The focus therefore needs to be not only on the quantitative but also on the qualitative. This poses interesting questions to us today. It forces us to ask ourselves are we providing the base of the pyramid with what they need or are we providing them with what we think they need? what difference is what we are doing making in terms of providing the base of the pyramid with a greater avenue of choices to escape the poverty and impoverishment that binds them?
It brings us to the realization that when we talk about financial inclusion we should not merely talk about the quantitative but also about the qualitative. There needs to be a focus on sustainability; on providing the base of the pyramid with access to financial services and products that are designed to help bring about transformational changes within the structure of rural society and economy that will help it escape from the clutches of poverty and grow while at the same time providing adequate protection to those making use of these products and services. The task of financial inclusion will be incomplete if the common man at the base of the pyramid, who is in a vulnerable position due to poverty and marginalization is not protected and is left even more vulnerable at the end of it.
it requires us to adapt and adopt newer systems and processes to cater to the demands of different geographical, economical and social environments with the purpose of breaking restraining forces that are inhibiting their economic development and hence fulfill the objective of achieving sustainable growth that is all inclusive.
Why it is that poverty characterizes vast tracts of rural India and people there aren’t able to use the ladder of access to alternative sources of finance to escape the clutches of poverty and the social and economic shackles that a poorly performing agricultural sector has imposed up on them. Why is it that large numbers of landless agricultural laborers AND farmers continue to be dependent on agriculture despite falling wages and incomes?
The answer to this is that though the architects of India’s poverty alleviation programs had their intentions right and realized that providing financial inclusion in the form of access to formal financial institutions and their services to the most impoverished segment of the population would help them to break away from their dependency on incomes from agriculture and also liberate them from the clutches of the moneylender (principally responsible for a large part of rural indebtedness); in implementation the “financial inclusion” did not go further than increasing the number of bank branches in rural India and emphasizing on credit requirements of the rural population; most of which again went to the land owning segments of the agricultural class who were able to muster sufficient collateral.
There was hardly any focus on providing the landless laborer with credit let alone other financial products and services including savings, insurance, etc. Thus the rural financial infrastructure that came about was quantitatively impressive but qualitatively poor.
What they forgot was that the approach towards making financial inclusion a reality needs to focus on perceiving the common man at the base of the pyramid not merely as a recipient of the financial services that institutions hand down but also as an important stake holder in the entire process; one for whom these products and services are a gateway to greater freedom from poverty and underdevelopment. The focus therefore needs to be not only on the quantitative but also on the qualitative. This poses interesting questions to us today. It forces us to ask ourselves are we providing the base of the pyramid with what they need or are we providing them with what we think they need? what difference is what we are doing making in terms of providing the base of the pyramid with a greater avenue of choices to escape the poverty and impoverishment that binds them?
It brings us to the realization that when we talk about financial inclusion we should not merely talk about the quantitative but also about the qualitative. There needs to be a focus on sustainability; on providing the base of the pyramid with access to financial services and products that are designed to help bring about transformational changes within the structure of rural society and economy that will help it escape from the clutches of poverty and grow while at the same time providing adequate protection to those making use of these products and services. The task of financial inclusion will be incomplete if the common man at the base of the pyramid, who is in a vulnerable position due to poverty and marginalization is not protected and is left even more vulnerable at the end of it.
it requires us to adapt and adopt newer systems and processes to cater to the demands of different geographical, economical and social environments with the purpose of breaking restraining forces that are inhibiting their economic development and hence fulfill the objective of achieving sustainable growth that is all inclusive.
Wednesday, July 21, 2010
Remittance: a step towards financial inclusion
Financial Inclusion is the buzzword doing the rounds in the social sector these days. Financial inclusion is an umbrella term used to represent access to various financial services by the poor (bottom of the pyramid!). One of these services is the transfer of money i.e. remittance; a field which is seeing a lot of developments lately.
Remittance in common parlance refers to the transfer of money by a person abroad to his family/friends in his/her home country. Various reports by World Bank, United Nations University show that remittances form the second largest source of international finance to many developing countries of the world, often surpassing the official development flows. International Fund for Agricultural Development (IFAD) 2006 estimates put the total flow of remittances to developing countries at $301 billion (including informal channels) while the World Bank estimates are $250 billion (excluding informal channels), which mirrors the huge market potential.
And we are not just talking about the rich or middle-class but the poor too. We have known through personal experience or news stories about the sheer no. of unskilled labour who have migrated to areas for e.g. Gulf (from Kerala) in search of livelihoods. And it is this section of migrants that the development sector needs to concentrate on by ‘introducing’ formal channels to them which can be better leveraged to promote economic development.
Remittances make a real difference to people, a difference that’s measured not in money but in its ultimate utilization for better food, medicines, education and healthcare. But what’s the connection between remittance flows and financial inclusion?
In countries like Ghana, remittances can account for up to half the household income. In Bangladesh, they can represent most of the household income. It is estimated that about 10% of the world’s households receive remittances (DFID). And while this money is used to support basic necessities like roti, kapada, makaan, it can have a multiplier effect. It is known that most often the excess money is further invested for genetrating profits for the family. The cumulative effect on the economy could be increased employments, increased money flow for investments, thereby stimulating growth. And it is this aspect that if encouraged, can help communities to come out of poverty.
Money is sent through formal channels like banking institutions or money transfer agencies or more frequently, as in case of poor migrants, through informal channels like friends, acquaintances or illegal Hawala channels. There a number of impediments faced in the informal fund transfer – higher charges, delivery issues, possibility of theft etc., which may not just mean reduced money to the beneficiary but may even further tax the family. On the other hand, the formal channels ensure easy transference of the entire amount in return for set charges. And as money transfers through formal channels often require the use of a bank account, remittances promote access to formal financial services for the sender as well as recipient.
However the problem lies in the fact that the penetration of the formal channels is much limited, due to the same demand and supply problems which are plaguing the banking sector - problems of availability and accessibility, identification, information gap, illiteracy, higher operational costs.
This situation if utilized efficiently can prove to be a win-win situation for all stakeholders. As Dilip Ratha(World Bank) points out, encouraging remittances through the banking channels (formal channel) can increase the development impact of remittances by encouraging more savings and furthering investment opportunities. Banks and other financial institutions can introduce their other products to its remittance customers thereby reducing their costs per customer. MFIs can make use of the history of the remittance receipts to map out the credit history of the potential customers.
Access to remittance services in rural and remote areas can be improved by encouraging the participation of the microfinance institutions, credit unions, and saving banks (including postal saving schemes) in the remittance market thereby effectively increasing the probability of usage of formal channels by the poor.
The opportunities are limitless; and if combined with initiatives by the financial institutions and policy and regulatory support by Governments have the potential to make a difference!
Remittance in common parlance refers to the transfer of money by a person abroad to his family/friends in his/her home country. Various reports by World Bank, United Nations University show that remittances form the second largest source of international finance to many developing countries of the world, often surpassing the official development flows. International Fund for Agricultural Development (IFAD) 2006 estimates put the total flow of remittances to developing countries at $301 billion (including informal channels) while the World Bank estimates are $250 billion (excluding informal channels), which mirrors the huge market potential.
And we are not just talking about the rich or middle-class but the poor too. We have known through personal experience or news stories about the sheer no. of unskilled labour who have migrated to areas for e.g. Gulf (from Kerala) in search of livelihoods. And it is this section of migrants that the development sector needs to concentrate on by ‘introducing’ formal channels to them which can be better leveraged to promote economic development.
Remittances make a real difference to people, a difference that’s measured not in money but in its ultimate utilization for better food, medicines, education and healthcare. But what’s the connection between remittance flows and financial inclusion?
In countries like Ghana, remittances can account for up to half the household income. In Bangladesh, they can represent most of the household income. It is estimated that about 10% of the world’s households receive remittances (DFID). And while this money is used to support basic necessities like roti, kapada, makaan, it can have a multiplier effect. It is known that most often the excess money is further invested for genetrating profits for the family. The cumulative effect on the economy could be increased employments, increased money flow for investments, thereby stimulating growth. And it is this aspect that if encouraged, can help communities to come out of poverty.
Money is sent through formal channels like banking institutions or money transfer agencies or more frequently, as in case of poor migrants, through informal channels like friends, acquaintances or illegal Hawala channels. There a number of impediments faced in the informal fund transfer – higher charges, delivery issues, possibility of theft etc., which may not just mean reduced money to the beneficiary but may even further tax the family. On the other hand, the formal channels ensure easy transference of the entire amount in return for set charges. And as money transfers through formal channels often require the use of a bank account, remittances promote access to formal financial services for the sender as well as recipient.
However the problem lies in the fact that the penetration of the formal channels is much limited, due to the same demand and supply problems which are plaguing the banking sector - problems of availability and accessibility, identification, information gap, illiteracy, higher operational costs.
This situation if utilized efficiently can prove to be a win-win situation for all stakeholders. As Dilip Ratha(World Bank) points out, encouraging remittances through the banking channels (formal channel) can increase the development impact of remittances by encouraging more savings and furthering investment opportunities. Banks and other financial institutions can introduce their other products to its remittance customers thereby reducing their costs per customer. MFIs can make use of the history of the remittance receipts to map out the credit history of the potential customers.
Access to remittance services in rural and remote areas can be improved by encouraging the participation of the microfinance institutions, credit unions, and saving banks (including postal saving schemes) in the remittance market thereby effectively increasing the probability of usage of formal channels by the poor.
The opportunities are limitless; and if combined with initiatives by the financial institutions and policy and regulatory support by Governments have the potential to make a difference!
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