Developing the Microfinancing Business Case
It began when the founder of Janalakshmi, a microfinance institution based in Bangalore, India, read Weathehead's Dr. Sayan Chatterjee's book Failsafe Strategies: Profit and Grow From Risks that others Avoid (Wharton School Publishers 2004) and called him for feedback on the risk in microfinance models.
Chatterjee, a professor in the Marketing and Policy Studies (MAPS) department at Case's Weatherhead School of Management, agreed to help and made his first entry into the growing world of Micro Finance Institutions (MFI) in developing countries. Not long after his initial work with Janalakshmi, Judy Rodgers, executive director of The Center for Business as an Agent of World Benefit (B·A·W·B) asked him to write a business case about Hindustan Lever's Project Shakti. That request, coupled with the interest sparked by his early work with Janalakshmi, motivated Chatterjee to join with Professor C.N.V. Krishnan, also of Weatherhead's MAPS department, to create the Institute for Studies in Microfinance and Poverty Alleviation housed within The Center for B·A·W·B. He subsequently traveled to India from December 9, 2005 through January 9, 2006, to find out more about MFI's.
His exposure to MFI's resulted in a growing interest in generating research to understand the different strategies employed by MFI's at a granular level. While in India, Chatterjee taught a class at the Institute for Financial Management Research in Chennai, using the Project Shakti business case as a teaching tool for a group of students involved in rural microfinance initiatives. He also reconnected with Janalakshmi and has now developed a research project regarding their current move from rural markets (under their original company called Sanghamitra), where they have been lending to Self Help Groups (SHG) - primarily women - for a long time, to the urban market. Janalakshmi (Jana means people and Lakshmi represents wealth; therefore "people's wealth") arose out of a need to provide quality financial services in a sector that presently only receives informal credit: the Indian Sub-Prime Sector. This sector is not clearly defined, but lies between what is called the urban poor and the people who qualify for formal credit. While those who qualify for formal credit have access to a range of financial services, the urban poor receive credit substantially from Non-Governmental Organizations (NGOs) and MFIs. However, there is a large segment that is technically not "below-the poverty line", but still has difficulty in getting adequate financial services.
Collectively called the "sub-prime" sector, this segment has to make do with informal credit, poor savings instruments, and minimal coverage on other financial products like insurance and integrated services. This is the sector Janalakshmi seeks to serve. Chatterjee's research and creation of a business case based on Janalakshmi's move into the "sub-prime" urban sector has sparked interest from three groups who want to use his methodology to develop similar cases in India. Chatterjee's research project has now partnered with those three groups: The Susan and Michael Dell Foundation, CARE India, and Intellecap. This sector is very different from the typical MFI initiative based in rural India based on the Grameen model started in Bangladesh.
"I have a research associate at the Institute for Financial Management Research who is assisting me with the Janalakshmi case," said Chatterjee. "This semester I will be using the Project Shakti case in my classes [at Weatherhead] to stimulate discussion among the students about the creation or exploitation of white spaces (undeveloped market opportunities)."
Chatterjee says now that with Janalakshmi's move into the urban market, many things will be different and the financing will encompass as many men as women. His research on the urban market shows India's urban market of 280 million people is currently 28% of the Indian population. The urban poor alone form 35-40% of the population, and surveys show that only 0.1% of them have banking relationships. Basic credit needs of the urban poor are estimated to be Rs. 300 crores ($60 million U.S.D.) in Bangalore alone. The urban market contributes 62% to the GDP in the country; it is clearly the hub of economic activity for India, consisting of a substantial informal economy that supports the formal enterprises. These micro-enterprises need a range of financial services, including savings and credit.
In Bangalore, internal studies indicate that the unmet credit needs of the sub-prime sector are estimated to be 1500 crores ($15 million USD). The urban population is projected to grow to 50% by the year 2030, representing a market of over 600 million customers. The sub-prime and urban poor will comprise a substantial portion of this growth. Urban areas in India account for only 2% of the landmass of the country. Some of the challenges of accessing the poor and sub-prime markets with MFI offerings in rural areas are distribution and access costs. Given the density of urban areas, access costs in the urban sub-prime sector should be minimal, if communications and technology infrastructure are appropriately leveraged. There is increasing evidence that, for developing economies, the key to long-term growth lays in accessing the "bottom of the human pyramid." The challenge lies in developing profitable models to effectively serve the poor and innovating for service delivery.
While there is a sound business case to be made for servicing the sub-prime sector, Janalakshmi will attempt to bring a new approach that combines the positives of the market with its essential purpose of supporting the poorest of the poor. Here, the positives of the market are seen to be customer focus, efficiency in operations, superior financial returns, healthy compensation and career opportunities for employees. All these are critical elements for a scalable, sustainable institution. The balancing factor is that a segment of these returns - initially all returns - will be invested back into the poor "to bootstrap their lives out of poverty." This is not being done as a form of corporate philanthropy, but rather is being built into the design of the institution through the creation of Janalakshmi Social Services (JS), a Section 25 company, which will hold the equity of a second institution, Janalakshmi Financial Services (JF).
In addition to holding the equity of JF, JS will operate at the social end of the financial services spectrum, providing capacity building investments to the poor in a variety of carefully designed interventions. These investments would be undertaken with the returns from JF. It will also provide early credit linkage to the poor through the extension of Self-help Group (SHG) loans, which Janalakshmi sees as the first step in establishing a banking relationship with the poor. This relationship will grow into individual services over time.
Chatterjee's research analysis of these strategies will result in insight about the critical assumptions driving the business model as well as the capabilities - technology, people, partners, logistics, regulations - needed. According to Chatterjee, the Janalakshmi case should be a roadmap for new MFI's trying to enter the business.
"I would not classify myself as a very good ‘do-gooder', said Chatterjee, "but this research has shown me that by using innovative business models we can create capital at the bottom of the pyramid. NGO's do not achieve this because they do not have a capitalist (profit oriented) mindset."
Through his Institute for Studies in Microfinance and Poverty Alleviation and the research projects he develops, Chatterjee hopes to come up with generalizable concepts that can be used in other parts of the world and will eventually lead to taking a look at whether SHG's can be expanded to the inner city poor in developed countries as well.
By Janet Roberts