The Conversation

Microfinance, Mega Impact

This has been copied here in all its originality from Professor .V. Govindrajan's mail.

11:21 AM Tuesday March 16, 2010
by Vijay Govindarajan | Comments (40)

Microfinance is more than an innovative scheme to provide loans to poor people. At its core, it's about individual empowerment and dignity.

This January, I took 50 senior executives from global corporations to India. As part of their learning experience, I invited Pankajam, one of the beneficiaries of Kudumbashree, the innovative microfinance program in South India, to tell us her story. Pankajam comes from tribal India. Tribal people are truly at the bottom of the pyramid — extremely poor and illiterate. Pankajam is no exception. She got a $15 loan ten years ago and Kudumbashree gave her training to start a micro enterprise, lease farming.

In a flurry of entrepreneurial activity over ten years, Pankajam moved from lease farming into dairy, then poultry, and then expanded her operations in all three. She put one daughter through college; that daughter later became a teacher. Another daughter is now in college, studying to become an accountant, and a third daughter is in high school, with aspirations to be a doctor. Though her initial loan was tiny, Pankajam successfully transformed the lives of her daughters.

But what was most impressive was how Pankajam herself was transformed.

In the U.S., we consider an income of $2 a day or less "poverty." But I define poverty as marginalization: powerless, voiceless, not free. Microfinance gave Pankajam a voice. Pankajam answered all the questions of the executives with a great deal of confidence. I confess she made better eye contact with the participants than do our Tuck MBAs! No doubt Kudumbashree gave Pankajam financial freedom, but it did much more. The last question that participants asked Pankajam was, "You have been in microfinance for 10 years. If you were to pick the number one good thing that happened to you, what would that be?" Pankajam hesitated and then said, "Perhaps the best thing is, without microfinance, Professor Govindarajan would not have invited me to come and address all of you today." Microfinance gave Pankajam an identity.

There are many Americans who make much more than $2 per day and still feel marginalized. That is the reason Dr. Muhammad Yunus, the "father" of microfinance, won the Nobel Prize — not because microfinance is an ingenious finance scheme, but because it gave dignity and voice to poor people.

Since its beginning with Dr. Yunus in Bangladesh, the microcredit banking model has spread to more than 100 countries. Today, it has gained a foothold in the U.S. among poor neighborhoods in New York City. This is reverse innovation: innovations from poor countries that can transform people in rich countries.

I asked participants to consider the following: Had Pankajam's father received a $15 loan, could she be a doctor, an accountant, or a teacher? Whose fault is it that Pankajam is illiterate? Is it her fault? She's plenty smart. She was certainly able to handle all the questions from senior executives from Fortune 500 companies with a great deal of ease.

Who causes poverty in this world? Poverty is not caused by poor people; it is imposed on them. It is an institutional failure: we deny poor people access to education, finance, and health. In some sense, therefore, all of us are collectively responsible for building institutions that will bring marginalized individuals into the mainstream.

Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth. He writes a blog and a newsletter on innovation and execution.