Profiting from poverty

Making money from the poor is not a bad thing according to a new book, writes Salil Tripathi

Friday January 7, 2005

When Robert McNamara was president of the World Bank, he visited Dharavi, near Mumbai airport, then, as now, one of the largest slums in the world. Looking at the abject poverty in the shantytown, he broke down, possibly realising the enormity of the task ahead.

For anyone visiting Dharavi, where nearly 1 million people live, the sight isn't pleasant at first glance. There is row upon row of ramshackle huts flanking pipelines and a railway line, all surrounded by an overpowering stench. Open drains, piles of uncleared rubbish, and shacks stretch as far as the eye can see. There is little by way of urban infrastructure.

But such a casual glance would miss the thousands of TV aerials sprouting from those homes, and the motorcycles, and increasingly cars, owned by the people who live there.

For too long, urban squalor and urban poverty have gone together. But there is a thriving economy in Dharavi (just as there is in Soweto, South Africa), consisting of small-scale industries, making plastic products, handicrafts, stationery, garments, tallow, watch strap buckles, WHO-certified surgical equipment, food products and a massive recycling industry.

In spite of municipal neglect, someone, somewhere, provides water, food, electricity, and other essentials. Such products and services are sold without any quality control, and usually at a steeply escalated price.

For example, a cubic metre of clean water costs $1.12 (59p) in Dharavi, but only $0.03 at Warden Road, a posh area of Mumbai. Diarrhoea medication costs $20 in Dharavi, ten times what it costs at Warden Road.

In The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, C K Prahalad calls this situation the "poverty penalty". But the University of Michigan management lecturer argues that if the poor are treated with dignity, empowered and seen as innovators, there's a fortune to be made.

Dr Prahalad notes that huge potential profits can be made from serving the 4 billion to 5 billion people living on under $2 a day - an economic opportunity he values globally at $13 trillion a year. And making profit from such a market, he says, is not a bad thing.

The poor will gain when they are empowered with choice, as they will be freed from the poverty penalty. Bringing down these premiums can possibly make the market represented by the poor more profitable than the top end.

Take consumer finance in a country where the prevailing lending rate is 12%. Think, then, of a major international bank, lending money at 25% to the poorest sections of the society.

The idea might sound appalling, and contrary to all known examples like the Grameen Bank in Bangladesh and Sewa in India. But Grameen and Sewa do not operate everywhere, and increasingly, commercial banks are getting involved in such markets, trying to reach people untouched by the organised sector.

If a poor person tried to borrow money at 12%, they would not get a loan, because they would not have any credit history or assets to offer as security. If they went to the nearest moneylender or pawnbroker, they would get the finance - but at an interest rate of 300%-500%. The choice, for the poor, is between no loan or a loan at a extortionate rate of interest.

Which is where the international bank comes in, offering finance at 25% - substantially higher than what it would offer the middle class or the rich, but far more affordable than a 500% rate.

Is that unfair? Quite possibly, yes. But is it better than the alternative? Yes, says Dr Prahalad: it brings the rate down from 500% and once it reaches 25%, it is possible to negotiate downward to 12%. Indeed, with banks like Grameen offering even cheaper finance, if the poor are well-informed they will make the rational choice and drive rates down further.

This is not a hypothetical example. Citibank, the US banking giant, has made such loans in India and other parts of the world, and the repayment rate has outperformed many other market segments.

Dr Prahalad is not a huge fan of the traditional thinking on aid, which sees the poor as victims to be helped, rather than as dignified people who can be part of the solution.

In any case, this is an issue beyond aid. There is limited aid money with many priorities, from combating HIV-Aids to rebuilding Asia after the tsunami, to say nothing of other development priorities. But however desirable the goal of servicing the poor may be, it comes after some of the more important, competing priorities.

Nor is Dr Prahalad enthralled by the corporate social responsibility programmes that many companies run. To make a serious commitment to poverty, the poor should not be seen as recipients of philanthropy, but part of a company's profitability. The poor, as a market, must become "integral to the success of the firm in order to command senior management attention and sustained resource allocation".

Several companies have shown such innovative thinking, offering products and services to the poor, and increasing their profitability.

How does one do that? Not by downscaling products offered to the wealthier customers. Rather, by re-engineering and redesigning products and services. Hindustan Lever, in India, sells detergent and soaps in small sachets and smaller quantities and small sachets that may appear uneconomic to a western manufacturer, but meet customers' needs.

According to Dr Prahalad, the new thinking is reflected in a simple proposition: "If we stop thinking of the poor as victims, or as a burden, and start recognising them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up."

These steps won't, by themselves, remove poverty. Nor would every business proposition to service the poor succeed. But it would give the poor dignity, grant them greater choice and empower them, he concludes.