Making a profit while helping the poor
Seattle Times business reporter
Council on Foundations 58th annual conference
More than 2,000 people are expected to attend this year's Council on Foundations conference today through Tuesday at the Washington State Convention and Trade Center. The largest annual gathering on philanthropy will focus on poverty, public health, the environment and disaster preparedness.
Speakers include Melinda Gates; writers Barbara Ehrenreich, Arianna Huffington and Jim Wallis; and talk-show host Tavis Smiley.
The event, which is not open to the public, will be held in tandem with the annual meeting of Philanthropy Northwest. For more information, go to www.cof.org
During a recent visit to the U.S. from India, Vikram Akula walked into a downtown restaurant to talk to a group of well-heeled Seattle philanthropists about how they could help end poverty.
Confident and articulate, he held a microphone and paced in front of the crowd like a talk-show host.
As one of the new mavericks bringing banking to the poor, Akula didn't mention Mother Teresa, the World Bank or the U.N. His guiding lights are Starbucks, Coke and McDonald's.
"My single goal is to eradicate poverty," he said. "The best way to do that is to apply a business model."
SKS Microfinance, which Akula started in 1988, connects opposite ends of the global economy: poor women in India looking for loans to expand their tiny businesses with wealthy investors in the U.S. who are hoping to make a 20 percent profit.
The traditional system of loans to the poor by aid groups, known as "microfinance," relies mostly on charitable donations.
SKS is helping transform that field by plugging into the engines of commercial capital. Along the way, SKS has picked up a nickname: "the Starbucks of microfinance."
SKS' growth reflects an explosion of interest in providing financial services to the world's poor among socially minded entrepreneurs and major funders such as the Bill & Melinda Gates Foundation. As banks and venture capitalists take an interest in microfinance, they add valuable resources to "scale up," or expand credit to millions more who could benefit.
But they are also stirring debate over whether such loans are reaching the neediest people, and whether the quest for profit could detract from the original goal of helping the poor.
A "middle ground"
Unitus, an innovative Redmond nonprofit supported by the Gates Foundation, is one of SKS' biggest backers.
Its for-profit arm, the $23.4 million Unitus Equity Fund, is the first microfinance fund consisting entirely of private investment.
One investor, Abacus Wealth Partners, includes "entrepreneurs, business owners, working professionals, athletes, entertainers, inheritors, divorcees and retirees" with a net worth between $3 million and $30 million, according to its Web site. An SKS investor, Sequoia Capital, is better-known for investing in companies such as Apple, Google, Yahoo! and YouTube.
Chris Brookfield, who used to make telecom deals for wireless pioneer Craig McCaw, still works the big-money crowd. Only these days, as investment director for Unitus Equity Fund, he raises venture capital to channel into microfinance programs for the poor.
Over the past year, Brookfield has shuttled every few months between the offices of wealthy investors on the West Coast and the poorest slums and villages of India. Visiting borrowers in Bombay, for example, is a "visceral" experience: He says many live with their entire families in one-room shacks next to open sewers.
"In one sense it's kind of brutal, but in another sense it's very hopeful," he said.
Unitus has invested $2 million in SKS. That money allows SKS to borrow from traditional banks, then make loans averaging about $150 to thousands of poor people.
The borrowers, mostly women who use the money to buy fish nets, goats or water buffaloes for their livelihoods, pay back SKS with 25 percent interest. SKS then pays about 20 percent to the original investors, considered a healthy return for venture-capital funds.
It isn't such a bad deal for the impoverished borrowers, either: The only loans usually available to the poor in India are from local moneylenders who charge interest rates of up to 120 percent.
So far, SKS says it has a 99 percent on-time repayment rate.
What keeps Brookfield going is the thought that a year spent raising money will help 600,000 people. Many use their first loan to buy a water buffalo for about $175. They'll make $1.50 a day from the milk, and use the profit to pay back the loan.
"At the end of the year they own a buffalo, and we get our money back," Brookfield said.
"There's an entrenched idea that you're either doing charity or you're making money and there's nothing in between," he said. "I'm trying to walk the middle ground."
Brookfield's work is emblematic of the manner in which for-profit thinking is changing the way nonprofit organizations operate.
That change is driven, in part, by a new generation of wealthy donors ready to apply their business skills to social missions. It's also a recognition that disease, poverty and other global problems are so complex they require new forms of collaboration.
Google.org, the search giant's philanthropic arm, was created without tax-exempt status so that it can support both for-profit and nonprofit work — and make money in the process. The X Prize Foundation, headed by former Gates Foundation education director Tom Vander Ark, sets goals around large projects that benefit humanity and rewards millions of dollars to the first team to achieve them.
Nonprofits such as the Gates Foundation and Seattle-based PATH are working with pharmaceutical companies to push development of vaccines for neglected diseases that ravage developing nations. They've taken the unorthodox step of paying for research the drug companies would not do otherwise, because there isn't demand for such drugs in wealthier countries.
The foundation also must provide funds for poor countries to buy the vaccines, convince government leaders to include them in their health budgets and find an effective distribution system.
It's like building a market from scratch, said Erik Iverson, the foundation's associate general counsel.
"The Gates Foundation is seen as a venture capitalist," he said. "In return, what we want is lives saved."
Jim Kim, a Harvard health expert who formerly led the World Health Organization's (WHO's) AIDS programs, said lately when he thinks about how to solve the health-care crisis in developing countries and at home, he gets the most inspiration from his colleagues at Harvard Business School.
Many nonprofit leaders say applying business sensibility can help them operate more effectively.
"We're going to be better stewards to the degree that we have better business systems, where we are analyzing costs and benefits, where we are aware of return on investments," said Peter Blomquist, vice president for constituency development at Mercy Corps, a global relief-and-development group.
Portland-based Mercy Corps, which supports 13 microfinance projects around the globe, started XacBank in Mongolia as a nonprofit and then guided its transition into a for-profit financial institution and later a private commercial bank. Mercy Corps took an equity stake, which could generate money in the future to support its programs and allows it to ensure the bank continues the original social mission.
Few efforts blur the line between doing good and making money as dramatically as the for-profit microfinance programs.
Offering a healthy return on investment is the only way to attract the kind of capital necessary to offer credit to all the poor people who could be helped by it, proponents say. Microfinance experts estimate that small loans are available to only about 113 million of the more than 500 million working-aged poor people who could benefit.
"If that happened in telecom, we'd write off the industry," said Akula, the head of SKS. "In microfinance, we celebrated it, we gave ourselves rewards."
SKS, using investments from Unitus and others, hopes to expand from 620,000 clients to 5 million in the next three years. It is opening 30 branch offices a month.
"Starbucks rolls out 100 new stores every month," said Akula, who plans to take his company public in India. "Today you can get a Coke in virtually any village in India. If they can do it, why can't we?"
The arrival of private investment into microfinance has been greeted with some wariness.
The most prominent skeptic is Muhammad Yunus, the economist who won the Nobel Peace Prize for his pioneering work establishing microcredit programs for the poor in his native Bangladesh and around the globe. He cautions against seeing the poor as a source of profit.
"I would just appeal to them, 'Don't go all the way to maximize profit in a kind of literal sense, not to grab as much money as you can,' " he said in an interview last year.
There are also more pragmatic concerns.
It's still a major challenge for local microfinance groups to absorb large amounts of capital and manage fast growth, said Mary Ellen Iskenderian, chief executive of Women's World Banking in New York, which serves low-income women around the world.
Some commercials banks working with microcredit groups aren't just interested in alleviating poverty but in loaning money to the poor to buy televisions and other consumer goods, she added.
"Without financial infrastructure like credit bureaus and credit-reporting agencies," Iskenderian said, "you run a real risk of very poor people becoming heavily overindebted."
Others worry the loans are not reaching those on the bottom economic rungs.
"I'm very skeptical of any hype I hear that it's actually reaching the poorest of the poor," said Tim Hanstad, chief executive of the Rural Development Institute, a Seattle-based nonprofit helping India's rural poor own land. "You can't buy a cow if you have no place to put it."
Access to money is but one of many social and economic underpinnings needed to address poverty, including basic health, education and land, he said.
Unitus CEO Geoff Davis says he is sensitive to the criticism. He insists investor profits won't be "outlandish."
"We're seen as an ethical investor, somebody with morals who weighs the social and the financial benefits," he said.
Since private investment in microfinance is so new, Davis said it's hard to predict what amount of profit will be generated.
Still, he doesn't want to put the brakes on what he calls a revolution.
For Brookfield, Unitus' investment director, for-profit microfinance is a matter of bending and tweaking the system of global capital to reach "a layer of people who have been systematically excluded."
In the future, Unitus plans to use the microfinance networks to distribute health care, insurance and other services.
"There will always be people who look at it and say you're just making money," he said. "That's fine for people to take that point of view. For me, it's the only way to do this kind of work."
Kristi Heim: 206-464-2718 or email@example.com
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