Mohammed Yunus is a key advocate of microcredit. The liberation of the poor can only be achieved by encouraging entrepreneurship. Affordable credit should be availed to the poor for them to start businesses. Profits generated by businesses should be used for outreach activities for the benefit of the poor and the community. This is the concept of social business and is well expounded in the book, Creating a World without Poverty. The book describes a non-profit roadmap for releasing the poor people from the burden of poverty by empowering them to earn. Social business is proposed and it is a "non-loss, non-dividend business" (Yunus, 2007). This is a different concept from the conventional capitalist business where investors are profit driven.
Thesis statement: The empowerment of the poor via social business is not a viable solution as postulated by Yunus, and its application is not a sound universal cure to poverty in third world countries.
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Yunus introduces the socialist and some-what communist concept of social business. He proposes that social businesses should be run for social good and not to earn profit. Third world countries are worst hit by poverty. However, viable solutions need to be formulated to eradicate poverty. Businesses are run to make profit and Yunus seems to downplay this profit making aspect. In his praise for social business, Yunus (2007), asserts, “Investors in social businesses can get their investments back, but are not entitled to any dividend; and the profit would be ploughed back into the companies to expand their outreach and improve the quality of their products and services.” It is hard if not downright impossible to run business for social welfare instead of profit. Yunus proposes empowering the poor to start businesses. Self employment is rarely an option for the poor who are keen on securing employment. Consequently, most of these citizens settle for low wages and bad working conditions. They suffer greatly from global recession as companies cut back costs by firing and retrenching personnel. Entrepreneurship is a more lucrative alternative as the poor will build their own wealth. These start up businesses can only prosper if they are increasingly profitable. Compromising on profits at the expense of social welfare is detrimental to businesses. Yunus is not pragmatic as start-ups that run as social businesses are not likely to grow and compete in the world market.
According to Yunus, the concept of social business is viable and he cites successful individuals who give back to the society. Bill Gates, the founder of Microsoft is a philanthropist who funds many charities and initiatives to eradicate poverty, malnutrition and to bolster women empowerment. Yunus errs in likening Microsoft to a social business. Microsoft is a key and successful player in the capitalist economy. The company has maintained its dominant niche in the ICT industry. This has attracted many shareholders who are keen on investing in a lucrative venture. Companies like Microsoft have grown due to shareholder confidence. Shareholders are more conscious of profits and rarely consider the company’s social standing in the process of forming the investment decision. In this case, Yunus appears to confuse the corporate social responsibility of successful companies with businesses that fit the social business construct.
As is evident in the likes of Yunus, many stakeholders such as government officials and scholars have the good intention of empowering the poor. Capitalism has been cited as a major stumbling block to all world economies. The capitalist economies that create this phenomenon also influence factors that inhibit the poor’s ability to financially re-empower themselves thus creating poverty. Poverty is a major problem in the world today because of the global increased cost of living. Yunus describes poverty as a major threat to peace. "Poverty is perhaps the most serious threat to world peace, even more dangerous than terrorism, religious fundamentalism, ethnic hatred, political rivalries, or any of the other forces that often cited as promoting violence and war. Poverty leads to hopelessness, which provokes people to desperate acts.” This position inspired him to conceptualize social business as a remedy for poverty and he founded a microcredit institution (Grameen Bank) that would operate as a social business. Technically, people blame past systems of wealth distribution but there are others who believe that they are sufficient, if only their flaws are corrected. The rate at which the economies of third world countries grow in relation to the population growth leaves little room for the improvement of the poor half’s economic power. As a result, we have seen a rise in poverty rates despite governmental efforts to curb it. The elite manipulate the business environment to make profits and the poor masses continue to be impoverished. However, social business as proposed by Yunus remains a non-viable alternative to capitalism. Simply put, the profit making principle cannot be replaced with the social benefit principle.
Many third world countries have large numbers of unemployed and financially handicapped individuals. Since banks will not leverage money to them due to lack of security, they are forced to borrow from loan sharks for startup capital. The unscrupulous dealings of loan sharks are well known; the interest rates are obscene to counter the apparent lack of choices that the loaned individual has and their lack of security. This eventually leads to the creation of startups that end up not helping the poor out of their financial situation. In any case, they increase the chances that the poor will remain impoverished while increasing the assets and financial power of the rich.
Microeconomic institutions are described as those financial institutions whose business practices lean more towards leveraging small loans for little or no interest. Many of these institutions are funded by the returns that they get from the repaid loans. This means that the loans must have high repayment rate, which is especially hard to do when dealing with unsecured loans. It was hard for Yunus to convince banks to loan unsecured capital to startups and he created Grameen Bank specifically to act as the microfinance institution for the poor of Bangladesh (Yunus, 2007). Yunus appears to overlook the credit worthiness of the poor. In his defense he claims, “If we are looking for one single action which will enable the poor to overcome their poverty, I would focus on credit. Credit is a human right that should be treated as a human right. If credit can be accepted as a human right, then all other human rights will be easier to establish.” This is a noble gesture but it is another solution that is simply not viable. Banks cannot give loans to individuals who have no means to repay. Of course people with sound business plans deserve and can succeed in securing credit. However, this is risky since nearly 90% of all start-ups fail. Yunus needs to lay equal emphasis on business training. The poor need to identify their skills and talents. They should be assisted in commercializing their knowledge and skills via entrepreneurship. Community outreach projects that train the poor on various skills (tailoring, masonry, Information technology, carpentry etc.) have been a good initiative. Business ventures formed after the acquisition of such skills have been successful. The poor can start small enterprises by pooling their little funds. Thereafter, they can approach banks for loans to expand their small businesses. Banks are likely to advance credit to an operating business as opposed to a start-up.
Funding a startup is only half of the struggle; the rest depends on the financial prowess of the businessperson and their hard work. It is important for the startup to succeed because entire families are elevated out of poverty. Grameen Bank chose to leverage most loans to women due to Yunus’ observation of their money management skills. This is evident because over 90% of the bank’s loans were leveraged to female borrowers. It is also important to note that the bank’s loans have a repayment rate of 98%, indicating the effectiveness of this lending strategy. One of the hard things to do when dealing with money is agreeing about the correct lending rates that a bank can comfortably charge without impoverishing the borrower. After analyzing the Bangladesh situation, Yunus came up with an accepted range of interest rates that qualify a bank as a micro-finance institution. He argues that anything below 10% is commendable, between 11% and 15% is fair and anything above this should take their business to the richer market segments (Yunus, 2007). These rates, while okay for the Bangladeshi economy, are hard to defend in other parts of the world.
Many factors come into play when agreeing on the recommended lending rates, such as the costs of doing business in a particular country among others. However, the model suggested for Bangladesh can also be applied to various third world countries that share the same growth rates without much tweaking. It is therefore correct to agree that these figures do indeed give a mental picture of the expectations that should be placed on microfinance institutions in growing economies. This, however, only comes into play if we account for the differences between the economy of the said country and that of Bangladesh.
As a lecturer on financial theories, Yunus found it hard to teach practices that disregarded the economic gaps present in his country. Due to increased costs of living, it is becoming harder for the poor, who comprise more than half the world’s population to become financially empowered. This leads to a large problem as crime figures, mortality rates and malnutrition cases rise continually. Social businesses, as proposed by Yunus, provide an answer that seeks to repair this imbalance. With his ideas, he has propelled more than half of the Bangladeshi populace from poverty. Unfortunately, this success is not indicative of the suitability of social business. The concept though noble is not viable as has been reviewed in this paper.
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