Thursday, December 21, 2006

Social Entrepreneurship as Poverty Solution

Laxmama lives alone with her three children in the tiny village of Sidhanalli in the southern Indian state of Tamil Nadu, and just recently she was faced with a personal family crisis. Her 17-year old unmarried daughter underwent a botched partial abortion in the hands of a village “doctor.” Bleeding profusely, Laxmama took her daughter to a nearby private hospital where the physician reluctantly agreed to complete the abortion for a discounted charge of Rs. 4,000 (nearly $100). With little savings of her own, Laxmama turned to her local money-lender who immediately advanced her the funds at terms acceptable to her – Rs. 200 in interest and Rs. 200 in principal each month over 20 months. The loan was arranged in less than two hours, confirming the terms with her thumb impression on a two line promissory note. The surgery went off well, and her daughter has recovered since then.

The high interest charged by her money-lender would result in Laxmama repaying double the amount of the loan, but she feels that no one else would have provided the funds in such a short time to save her daughter’s life. She doesn’t know about today’s so-called social entrepreneurs who might have been willing to advance her a micro-loan at a relatively much lower interest rate. Even if she had known, she couldn’t have waited to go through the loan approval process.

Micro-credit is touted often these days as one good example of “social entrepreneurship,” especially since Dr. Yunus received the Nobel Prize last month. Yet there has been very little effort to define and distinguish it in practical terms. The assumption is that social entrepreneurship is “business for benevolence.” Some associate it with doing business in a deprived area, especially in a rural environment. Just as business entrepreneurs create and transform whole industries, social entrepreneurs are presumed to apply entrepreneurial principles and act as agents of change for society, seizing opportunities to advance sustainable solutions that create social value.

The question then is whether all entrepreneurial activities involving the poor can be termed social entrepreneurship.

The term "social activist" has been in existence without much ambiguity for quite a long time. Anyone who is engaged in bringing about social change is deemed to be a social activist. Many organizations are engaged in advocacy for causes such as fair labor laws and practices, women and minority rights, environmental protection, and others. Some of these organizations, for example, offer consultancy services to other institutions in ensuring compliance with regulatory requirements. None of these businesses are considered social entrepreneurs, even though their work might lead to social good. What makes them any different from today's self-proclaimed social entrepreneurs?

An entrepreneur is one who usually takes on personal financial risk to create value, with the expectation of generating profit; the real test for an entrepreneur is its success in mobilizing resources or generating income. Social entrepreneurship is more about creating social value from proper/innovative allocation and application of available resources than about conducting any business. But as it is understood today, social entrepreneurship implies some sort of business-like activity (preferably sustainable and self-supporting) that benefits the poor. The real distinction between entrepreneurship and social entrepreneurship is the main intent and purpose. A business or business-like activity that is intended mainly (or solely) for social good is social entrepreneurship. He/she is expected to run the entrepreneurial activity in a sustaining way, and preferably at a profit, so that he/she may be able expand the work and do more good for the poor. For the sake of clarity, let us examine a few cases.

No one doubts that Wal-Mart is a successful business, generating considerable profit for its shareholders. It is also one of the world's largest private employers, providing jobs to people from every segment of the society. Its purchase of innumerable products for subsequent sale is instrumental for the success of thousands of supplier firms. These suppliers/manufacturers employ millions of people, many of whom might have been previously unemployed or living in deprived areas around the world. Does the fact that Wal-Mart's entrepreneurial activities benefit many poor people qualify it to be called a social entrepreneur?

Let us take the case of a non-governmental organization running a rural hospital and carrying out several innovative outreach programs. It charges a small fee for its services, while most expenses are met by donor funds. This NGO is engaged solely in socially beneficial activities by conducting a "business" that is consistent with the financial ability of its customers. Does it qualify as a social entrepreneur?

Many people associate micro-finance activity to social entrepreneurship. There is no doubt that the borrowers of micro-credit are better off even at 36 percent annual rate of interest than being obliged to local money-lenders who might charge over 100 percent interest. But the lenders, usually called micro-finance institutions (MFIs), are seldom concerned about how the funds are used by their borrowers; their sole aim is to collect both interest and principal on the loans as per their lending terms. This form of credit is usually a profitable business for a variety of reasons that have little to do with any entrepreneurial activity among the borrowers. Does the fact that the borrower is able to obtain loans at interest rates lower than what a money-lender would charge qualify the lending organization as a social entrepreneur?


In my opinion, none of these cases fall within the true meaning of social entrepreneurship. As for Wal-Mart, it is engaged in a business activity to maximize profits for its shareholders, and not necessarily to benefit the poor. In fact, many accuse Wal-Mart of "squeezing" its suppliers who in turn might exploit their workers to keep costs low. Even though the consequential result of its business activity is job creation for many poor people who might not otherwise have comparable employment, the intent and purpose is not social good.

The NGO that conducts a quasi-business activity is certainly involved in doing social good. But it is not an entrepreneur that takes financial risk of its own and carries out a self-supporting activity. When donor funds dry up, its human services might also stop.

Despite the life-saving help, no one will argue that Laxmama’s money-lender is a social entrepreneur. However, the fact that MFIs charge interest at relatively lower rates than money-lenders does not necessarily qualify them as social entrepreneurs either. MFIs exist to make profits for their owners, and are least concerned about whether borrowers use the funds for worthwhile purposes.

Unlike local money-lenders who offer credit for the specific needs of borrowers (such as crop loans given prior to planting seeds and repaid after harvest, and loans to cover expenses toward medical emergencies like surgery), MFIs do not earmark their loans. Many borrowers utilize the loan to pay dowry for their daughters, cover expenses for festivals, and for other reasons that have little to do with income generation. The absence of any direct involvement on the part of MFIs to help the poor use the loans properly, and the mechanisms through which its financial risk is offset by government grants and obligations of groups (instead of the borrower alone) make this form of lending simply a commercial activity. In any other section of the society, their collection practices might be questionable, both legally and ethically. While MFIs also add value to their customers (in this case, for the relatively poor people), their primary intent and activities are not necessarily aimed at doing social good.

Everyone who does business in a rural or deprived area is not a social entrepreneur. In fact, many businesses are springing up these days with the financial support of governments to sell products to the "bottom of the pyramid". These forms of business activities are far from social entrepreneurships.

So, who is then a social entrepreneur? It is hard to find many individuals or institutions that meet the true test. Those who take on financial risk by engaging in a business or business-like activity designed mainly to benefit the poor are certainly social entrepreneurs. Hopefully, the entrepreneur who fits this definition is able to generate enough income to at least cover the expenses so that the business is sustainable.

What we really need are every day entrepreneurs who are prepared to invest in rural and other deprived communities. They would generate employment and income for many poor people. Only through vibrant business activity can the needed 2 to 3 billion new jobs be added in developing countries.

Businesses who conduct themselves in a socially and environmentally correct manner (by paying fair wages, ensuring worker safety, and adhering to environmental standards) are meeting their community responsibilities. Instead of searching for social entrepreneurs, it is time to raise the bar for our expectations of anyone who does business, especially in the rural sector.

Abraham George is the founder of The George Foundation (www.tgfworld.org), an NGO engaged in humanitarian work in India, and the author of “India Untouched: The Forgotten Face of Rural Poverty.

Please visit us at www.tgfworld.org and www.indiauntouched.com

3 comments:

dafna orly said...

Dear Dr. Abraham George,

i understand and respect that efforts to eradicate poverty are concentrated on india. do you believe that something can or should be done to alleviate poverty in the u.s?

i do not wish to compare poverties. homelessness, hunger, lack of adequate medical care, an inability to earn a livable wage are their own tragedies.

also what is your opinion of charity? Maimonides gives eight levels of charity with the highest level being self-sufficiency. yet all eight levels include the concept of charity as doing for another what they can not do for themselves.

in this new wave of social capitalism, charity seems to be a "bad word".

i am in agreement that NGOs can bridge the gap between goverments failures and the needs of the impoverished.

i look forward to a reply. in such case i would like to communicate with you more directly.

dafna orly said...

Dear Dr. Abraham George,

edit: "your" efforts to eradicate poverty are concentrated...

missing word

shuporna said...

Dear Dr. Abraham George

It seems you have established the NGOs more to earn money and fame than to spend the money for others...