Startups and Microfinance

I know, I know what do startups and microfinance have in common? And the last time this was tried it failed miserably…remember SKS Finance? I do and I wrote about it 8 years ago.

So what’s changed for me? A couple of things…first, I had the chance to meet Prof. Yunus at an event in Alibaug with about 100 other people. In 2006, he won the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance. Yes, that Prof. Yunus.

Prof. Yunus in Alibaug

The event was hosted by Nishith Desai Associates at Imaginarium AliGunjan their Blue Sky Thinking and Research facility in Alibaug. To say this facility is world class is an understatement! Prof. Yunus talked for about an hour about microfinance and what the future holds by talking about snippets from his new book – A World of Three Zeros.

Before I went to the event I Googled “Three Zeros” to understand the overall construct of the book. The one thing that stuck in my mind was, “how can he say have zero unemployment”. That seems so far fetched and out of touch with reality. Lucky for me, Prof. Yunus covered it very well and he is so clear in his thoughts it’s scary.

Essentially he says, we grow up in a system that makes us want to get a job and then when we don’t have a job we are unemployed. Why even go down that path of working for someone and instead be an entrepreneur then you are never unemployed. At this point he should have done a mic drop.

That was the first point, the second point was a question that was asked by Eric Maimon (yes, a New Yorker based in Bombay). His question was what can we do NOW and not wait for the future when Prof. Yunus and others were planning to gather in June 2020 in Munich.

That got me thinking, what if startups and other mature businesses got into microlending from a corporate social responsibility (CSR) initiative? The idea is that microlending would not be the main function of the company but as a way to help others.

The current trend in the Indian startup scene is funding startups that facilitate peer-to-peer (P2P) loans and SME lending which is just another name for microfinance. YourStory wrote an article about SME lending a couple of months ago and I’m sure since then, another 50 new startups have entered this space. But, I feel many of them will end up in the same situation as SKS. When you have margin expansion, hyper growth revenue targets and KPIs to achieve, you will just screw it up.

So for example, suppose you have a B2B SaaS platform that is used by kirana stores. Over time you can run some algorithms on the data and gauge their credit worthiness. And the interest rate you charge can be based on a benchmark like the State Bank of India FD rate for 1 year + 50bps to cover administrative costs. Yes, I know there is a tendency to say “let’s just charge as much as possible and make a ton of money.” However this activity should be thought of as a CSR activity and businesses will flock to these lower rates…imagine the stickiness of your platform. In the end, everyone benefits and that’s the whole point of what Prof. Yunus has been preaching since the 1970’s.

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