Creative Capitalism

Bill Gates wrote an interesting article in the latest issue of Time Magazine. It’s called ‘Making Capitalism More Creative’. Read it here. This is something I’ve been thinking a lot about lately as we explore expanding the Onelife India ministry into some sort of micro-financing. Micro-financing at its simplest is making capital (cash) available for small loans to the poor who normally would not have access to that type of financial service. The most famous example is Grameen bank in Bangladesh. One of the coolest examples is Kiva – which is not a microfinance institution itself, but instead connects those people with money and a desire to help with the microfinance institutions. Check it out!

The premise Gates is proposing is that we can increase our ability to help the poor if we take actions that create incentive for market driven, capitalistic investment to join in the task. The biggest example of this is the ‘Red’ campaign organized by Bono, and made popular mostly by Gap. Money is raised for the needy, Gap’s image is enhanced, and everyone thinks they are cool for wearing a ‘red’ shirt. Everyone wins, but mostly the poor that are being helped.

There is a key dilemma I continue to run into as I think about micro-financing. Do we raise a pile of money, charge just enough interest to cover admin, and then return the money back to the pile for reuse when it is repaid? This is the strictly charitable path. Or, do we create a structure designed to give a return on the investment, making money by charging higher but reasonable interest rates? In this case, raising the initial and ongoing capital funds becomes much easier, and we are still providing a great service to these individuals who would otherwise have no access to a loan.

It basically comes down to … is it reasonable to make a profit from the poor if it would sufficiently increase the capital available over time to help the poor? More people would join in if we created a 5% return, than if we were just taking donations. However, a donation would always be able to be re-used for another loan, while a person desiring a 5% return would at some point want to withdrawal his/her money. And if 5% is good, why not 8% to attract more investment ... at what point are you taking advantage of the people? And at what point is the return so low you might as well just ask for donations? Tough questions!

In the end, both structures are good. If you were designing a new micro-finance system, which would you choose, 'pure donation' or 'return on investment'?