Getting to Scale: How to Bring Development Solutions to Millions of Poor People

2. Why Business Models Matter

33 2 Why Business Models Matter michael kubzansky In the last decade, several events have conspired to substantially raise the level of effort and attention to private-sector-led approaches to addressing development needs. C. K. Prahalad’s Fortune at the Bottom of the Pyramid provided an important analytic underpinning, but probably more influential has been the rise of commercially viable microfinance and, more recently, mobile money solutions like M-PESA, which have demonstrated that it is feasible to serve very large numbers of very low-income households in a commercially viable manner and achieve some social impact.1 Microfinance serves almost 100 million borrowers (table 2-1) and almost 67 million savers. More quietly and less celebrated, examples from contract farming demonstrate that it is equally feasible to engage large numbers of small, poor farmers in commercially viable supply chains. Some examples, like the Kenya Tea 1. Prahalad (2004). The social impact of microfinance is a highly charged topic, with evidence ranging from studies indicating it has little impact on incomes and livelihoods (“Microcredit therefore may not be the ‘miracle’ that is sometimes claimed on its behalf, but it does allow households to borrow, invest, and create and expand businesses” [Banerjee and others, 2009]) to those that suggest other important impacts, including income smoothing (“There is evidence from a number of studies . . . suggesting that microfinance is good for microbusinesses” [Grameen Foundation, 2010]). It is beyond the scope of this chapter to take on the question of the impact of microfinance; moreover, its impact has arguably been the less important driver of the rush to replicate microfinance’s success . Inspiration is driven largely by the ability to cover costs in many models and reach hundreds of millions of people. 34 Michael Kubzansky Development Authority (KTDA) in Kenya, KRBL in India, and AICO in Zimbabwe , do business with 70,000 or more smallholder farmers at a time (figure 2-1) and contribute to substantial increases in incomes.2 As a result, many development actors now believe that one of the primary ways to achieve large-scale social impact is via commercially sustainable solutions —or what has been termed inclusive business. Private firms, social entrepreneurs , impact investors, and donors have invested substantial time and effort in supporting new initiatives at the intersection of the private sector and development in the last decade.3 While it is difficult to estimate the amount of donor money flowing into such efforts, or to quantify funding from multinational corporations (MNCs) or other large commercial enterprises, the Global Impact Investing Network estimates that impact investing has already capitalized $50 billion, and J. P. Morgan suggests that impact investing will be a $1 trillion asset class in the future.4 The newest J. P. Morgan/GIIN survey of 2. As a comparator, Standard Bank, typically cited as one of Africa’s largest employers in Forbes surveys, employs about 30,000 people (https://members.weforum.org/pdf/Initiatives/GHI_HIV_ CaseStudy_StandardBank.pdf). Safaricom in Kenya boasts 2,400 permanent employees (Safaricom, 2010). A Monitor Group analysis of Pradhan’s contract farming operations in poultry in India, for instance, suggests that it resulted in a 125 percent income increase for women who participated (Monitor Group, 2009). 3. The amount of donor spending on private sector or market-based solutions to poverty is not tracked, but IADB invested $150 million in its region between 2007 and 2011 (http://browndigital. bpc.com/publication/?i=92819), and the International Finance Corporation (IFC), which takes an expansive view, suggests that “in 2010 IFC’s outstanding portfolio included approximately $6 billion in investment and advisory services to more than 200 firms with inclusive business models” (www1.ifc.org/wps/wcm/connect/AS_EXT_Content/What%20We%20Do/Advisory%20Services/ Inclusive%20Business). 4. New York Times, April 24, 2010 (www.nytimes.com/2010/04/24/your-money/24wealth.html?_ r=2&pagewanted=all&); J. P. Morgan (2010). Table 2-1. Microfinance: A Business Model at Scale Assets (billions of $) Borrowers (millions) Depositors (millions) Africa 6.7 4.5 16.6 East Asia/Pacific 8.4 15.8 5.8 Europe/Central Asia 11.9 2.8 2.8 Latin America 29.2 15.0 15.5 Middle East/North Africa 1.6 2.2 0.1 South Asia 11.3 58.0 26.0 Total 69.1 98.3 66.8 Source: MixMarket, 2010 data (www.mixmarket.org). Why Business Models Matter 35 impact investors, released in...