consumer credit regulation in the UK
Corporate Governance: origins and challenges
Proposals for a price cap on high cost short term credit
The Need for Roots?
Syria: the Economic Implications of the Civil War
In Praise of Non-Bank Finance
The Price of Money
Numbers 4 Good
Sceptics Knock Success
Life, Liberty and Access to Credit
Osborne's Banking Reforms: A Hedge Too Far
Always Spend Wisely ....
A Truly Ethical Foreign Policy
Southern Africa: 2020 Vision
Mervyn Turns a Tidy Profit
Private Banking for the Poor
Teaching Jurisprudence in Namibia
George - Don't do that!
Do the Math
Two Cheers for the Walking Wounded
That's Fair Enough
How to Stop the Next Bubble
Muhammad Yunus is a modest man with much to be immodest about. In the mid-1970s, he started providing small loans to the poor of Bangladesh and in 1983 he established a bank, which he called Grameen ("of the village" in Bengali). Grameen flourished, and now employs 25,000 people. Every year it lends over $500m in small loans, primarily to women. This "microcredit" model has been copied all over the developing world, and in 2006 Yunus and Grameen Bank were jointly awarded the Nobel peace prize.
Not content with setting up one business, Yunus has created a series of companies under the Grameen brand name to provide cheap goods and services to the poor: mobile phones, student loans, knitwear, a textile mill, an eye clinic and, most recently, a joint venture with the French company Danone to sell low-cost yoghurt to rural children. Yunus has also written a manifesto for his style of entrepreneurship, which he calls "social business". This, he claims, will make it possible to put an end to world poverty, and on a shorter timescale than most people think achievable. It is, then, a very big idea, even if he is only partly right about the scale of the benefits involved.
In February, Yunus came to London to promote his new book Creating a World Without Poverty (PublicAffairs, 2007). I met him one cold morning, and we spent an hour talking about the book's central idea: the prospects for social business - businesses whose primary goal is to help the poor. As befits a former academic, Yunus's style of advocacy is patient and clear.
Yunus doubts the ability of governments, multinationals, charities and NGOs to achieve radical and sustainable improvements to the living standards of the poor, and instead looks to business. Yunus titled an earlier book, about Grameen Bank, Banker to the Poor; Yunus is now a business leader for the poor.
Social businesses, as Yunus describes them, make profits but do not distribute them. Investors get their money back but no more: no dividends or capital gains. All profits are reinvested in expanding the business, developing products or lowering costs. This is capitalism minus tooth and claw. The point is not to make the rich richer, but to allow the business to become bigger and thereby make a larger impact on the world; in Yunus's words, to allow the individuals who work for the business "to leave a signature on the planet."
Yunus's life story suggests that it took some time for him to discover what his own signature on the planet might be. He was born in 1940 in Chittagong, a city on the eastern edge of the Bay of Bengal. His father was a successful goldsmith, and his mother was known for her charitable nature, something Yunus says had a profound effect on him. He studied economics at Dhaka University, before a Fulbright scholarship took him to Vanderbilt University in Tennessee, where he completed a PhD in economics in 1970. He taught in the US for a few years before returning to newly independent Bangladesh in 1972, soon taking a job as head of the university economics department in Chittagong, city of his birth.
During the Bangladeshi famine of 1974-75, Yunus began lending small sums of his own money to local villagers. This taught him that access to capital was essential if the poor were to achieve self-sufficiency. Grameen Bank, and subsequently the whole idea of social business, grew from this simple insight.
The appeal of social business is nicely illustrated by the Grameen Danone joint venture, which is described in detail in the new book. Danone was created in 1973 by the merger of Gervais Danone, which made cheese and yoghurt, and BSN, which made glass products. Antoine Riboud, the first CEO, set out a vision for the new business that included both social mission and financial success. Antoine's son Franck became CEO in 1996, and wanted to find a new way to express this idea. A meeting with Yunus in Paris in October 2005 provided just such an opportunity.
Through the efforts of Emmanuel Faber, Danone's executive vice-president for Asia Pacific, Grameen Danone produced its first pots of yoghurt in January 2007. Within Danone as a whole, the joint venture is tiny. But for the CEO and his managers, it represents the heart and soul of the company, proving to their employees, shareholders and customers that Danone seeks not only to make money, but also to do good.
The idea that a company should strive for both financial success and social impact is not new. Plenty of company owners have provided benefits for their employees and for local communities. In Britain, textiles manufacturer Robert Owen and chocolate maker Joseph Rowntree are well-known 19th-century examples, as is French industrialist Jean-Baptiste André Godin. And it is over 100 years since Max Weber wrote his study of the origins of capitalism, connecting the values of the members of Protestant sects with their success in business.
Yunus is comfortable with portraying social business as the secular interpretation of the Protestant work ethic. Many of us may have jettisoned the theology that gave our ancestors the desire to do good, but the desire persists - especially among young people at the early stages of their business careers.
But Yunus is sceptical of the ability of profit-maximising businesses to offer what many of today's idealistic workers seek. And he is less interested in converting existing firms than in creating new social businesses. He does not believe in hybrid goals; companies will aim to maximise either profits or social impacts, he says - they cannot do both. Remaking capitalism Yunus-style will therefore require the evolution of a new species of business.
Does the idea of social business make sense? It is often dismissed as naive. Reviews of Yunus's book in the FT and the Economist have taken just that line, pointing out that the idea is not new and that these businesses are not big enough to make the impact that Yunus expects, given the scale of the problems they are tackling.
These are easy criticisms but, I suggest, lazy ones too. When you consider the impact of microcredit, it is not hard to envisage social businesses bringing about rapid and substantive change. Microcredit was not a new idea: Jonathan Swift helped establish funds for small-scale lending in Ireland in the 18th century. What Grameen Bank did was to turn the idea into a credible business proposition, and to encourage others around the world to follow suit.
Microcredit schemes typically lend small amounts of money - sometimes as little as $30-40. The idea is to encourage people who are normally denied access to credit, owing to their lack of collateral and credit history, to use the loans to start up small businesses or to develop existing enterprises. Microcredit banks tend to charge what look like very high rates of interest: 50 per cent or more, on an annual basis. But compared with the alternatives - which in the case of the rural poor usually means predatory moneylenders, who may charge 400 per cent on a loan, with the threat of violence if repayments are not forthcoming - the terms of microcredit loans are clearly attractive. Grameen Bank claims a repayment rate of 98 per cent.
Another feature of many microcredit schemes is their focus on women, who are often discriminated against by "mainstream" credit suppliers. Microcredit banks depend for repayment on the peer pressure that can be applied via informal networks of friends or families, and women are often the central points in such networks. About 95 per cent of Grameen's loans have gone to women.
When Yunus began lending in the mid-1970s, neither mainstream financial institutions nor development organisations thought microcredit had much chance of working on a large scale. But by the end of 2005 there were over 3,000 organisations operating around the world, providing credit to some 110m people. Most - around 85 per cent - are in Asia, but there are also significant schemes in Latin America and Africa.
Microcredit can also make a difference to people suffering from financial exclusion in the cities of the west. Grameen has just opened a branch in New York, lending to immigrants outside the mainstream US banking system. There are similar businesses in Britain: Fair Finance, based in east London (which I chair), and Blackburn-based East Lancs Moneyline, for instance. Both expect to become profitable, and hence sustainable, in the next few years.
Are microcredit organisations having a real effect on the lives of the poor? Are they capable of becoming large enough to reach all of the poor? In a recent survey of the impact of microcredit (Wilson Quarterly, winter 2008) economists Karol Boudreaux and Tyler Cowen argue that while microcredit might achieve less than its more enthusiastic advocates claim, its achievements are real: "Microcredit may help some people, perhaps earning $2 a day, to earn something like $2.50 a day. That may not sound dramatic, but when you are earning $2 a day it is a big step forward. And progress is not the natural state of humankind; microcredit is important even when it does nothing more than stave off decline."
As microcredit organisations grow, the cumulative impact of these small improvements to the lives of poor people starts to add up to a substantive change in the global economy. At the first microcredit summit, held in Washington DC in 1997, a target was agreed to provide microcredit loans to 100m of the world's poorest families by 2005 - an audacious goal, given that the figure was then less than 10m. In the event the target was reached at the end of 2006, but the fact that it was met at all is impressive. It also suggests there is potential for the rapid growth of social businesses, if they can come up with suitable products and a business model to deliver them sustainably.
In Britain we have a celebrated example of a social business - Jamie Oliver's Fifteen Foundation. The foundation helps disadvantaged young people build careers in the catering industry. The first Fifteen restaurant opened in London in 2002, and has been followed by others in Amsterdam, Cornwall and Melbourne. The restaurants, where the apprentices learn their trade, are profitable, but all profits are reinvested to support the social aims of the foundation.
In this example, the social impact is achieved through providing employment within the business itself. The product that the business sells - high-quality meals in a stylish restaurant - is certainly not targeted at poorer consumers. But Yunus is happy to describe ventures such as this as social businesses, so long as the business is profitable and its primary mission is to benefit the poor.
Yunus imagines two basic models for social business. One would closely resemble a profit-maximising business, except that ownership of the business would be restricted to poor people. If the business thrives, the poor will benefit through growth in the value of their investments. In the second model, the poor do not own the business, but they are the principal beneficiaries of the goods and services that the business provides. (Social business can combine both models: being owned by the poor and tailoring products to meet the needs of poor customers.)
Social businesses are not the same as those co-operative societies where the employees are also the owners. In a social business, day-to-day control rests with the managers, who are employed by the owners and held accountable in the normal way. So while a social business would look and feel just like any other business to their managers and employees, it is the investors who experience the difference. Except in the case of social businesses owned by the poor, once investors have recovered their start-up costs they would not expect to receive any future benefits.
According to Yunus, profit-maximising businesses give too much priority to financial returns at the expense of social impact; and charities and governments give too much priority to social ambitions at the expense of effective delivery of goods and services. Social businesses, he claims, combine social impacts with organisational effectiveness: they marry efficient means to virtuous ends. This assures their sustainability, allowing them to do good and do it well - for the long term.
Given rising levels of affluence in the west, many younger workers can afford to give greater priority to the needs of others than their grandparents felt able to. They also consider that companies with good intentions should be as intolerant of ineffectiveness as the best profit-maximising businesses are. Ends matter, but so do means.
It is open to doubt whether the social business sector can ever become as successful as Yunus claims. But even if it achieves only a part of his expectations, this will still be a great deal. Yunus's great accomplishment over the past 30 years has been to create a series of social businesses that work. He has left his distinctive signature on the planet; now he wants others to do the same.
Portugese publication or here