Social Finance Can Unlock Our Entrepreneurial Potential

Our economic system is unkind to the people at the bottom. According to the global devel­opment charity Oxfam, in 2018 the wealthiest 0.8 per cent owned 44.8 per cent of all global wealth. The same year, the 26 richest people on the planet owned as much as the poorest 3.8 billion people.

This economic disparity is part of the story of international migration. Wealth is not only concen­trated in a few hands, it is also concentrated in a few places. It is natural for humans to move in search of a better life: that is what drew homo sapiens out of Africa and into the wider world in the first place. Now, searching for a better life, migrants are drawn from their homes, towards these centres of wealth, becoming vulnerable to modern slavery and human trafficking along the way.

I see migration, human trafficking, modern-day slavery as inter-related outcomes arising from the failure of our global economic system. The system is built on an artifice that treats humans as unidimensional profit-seekers. As a result we have created a world exclusively driven by person­al profit – without stopping to think about how the system creates and allocates collective risks. Single-minded pursuit of self-interest created this unsustainable economy, which increasingly drives wealth to the top, leaving only a trickle to the rest of the people.

Yet humans are naturally multidimensional. They are not only selfish, but also sometimes self­less. That realization demands a wholesale redesign of our financial theories and architecture – to accommodate this new dimension, including in the way financial goods and services are provided. Social businesses – non-dividend companies created for the sole purpose of solving people’s problems – reflect this selfless objective, going beyond the relentless pursuit of profit.

We don’t sacrifice anything from the old theory by introducing this new enterprise model, but we do gain – a lot. In place of a single-purpose economy we create a dual-purpose economy. We give people more choice in how they wish to express themselves economically. We unlock their economic and financial potential.

Choice is also crucial in livelihoods. Our current system fashions ‘jobs’ for people, through which their labour is transformed into capital – usually owned by others. Everyone is assumed to be destined to find a job, and most of us are expected to work for someone else – popularly, ‘The Man’. Only a tiny fraction of the young people born today will have access to the capital needed to drive and transform the economy.

Yet naturally we are creators, not job-seekers. Our life journey is to unleash this creative capacity. We are so blinkered by the dominant paradigm that we don’t find it unnatural to see millions, even billions, of creative young people sitting around doing nothing. We never ask: ‘Could they be entrepreneurs?’ Yes, they could be. Because it is in their DNA. The problems of youth unem­ployment and informal and precarious employment are in this sense products of self-imposed blinkers created by our mental model of the world.

We must take off these blinkers. By rethinking our theoretical frameworks, we will help unlock this innate entrepreneurial potential. Instead of pushing people to undertake risky migrations and fall prey to coercive, fraudulent and illegal exploitation, we will be helping them build a life for themselves, in their homes.

This will not just require rethinking our theoretical models, though. It will also require rethinking our policies, laws, regulatory norms and financial institutions. It will require rethinking access to finance, to capital and credit, in the first place. Instead of seeing the unemployed as a problem, or as a source of cheap labour to be exploited, we must see their entrepreneurialism as an asset, to be developed, nurtured and enjoyed. As potential to be unlocked.

Today’s global financial system was built by and for profit-seeking businesses, to help them grow. It has performed this role very effectively. As a result, the financial system – and finan­cialization of the so-called ‘real-world economy’ – have become key vehicles facilitating wealth concentration.

Attempts to bring a human orientation to banking have always been an afterthought. Customers are ultimately treated as profit-centres to be exploited, not necessarily as economic partners to be nurtured. It has taken revolutionary leaders and their struggles to bring a people-orientation to banking. But despite all those efforts, social finance has remained a footnote in the global financial sector. Cooperatives came, people’s banks came, rural banks came – and over time they have all been tamed by the dominant model, bought up and integrated into mainstream banking, rather than bringing permanent change to mainstream banking.

Traditionally, mainstream banks have approached the provision of financial services to the poor as a question of ‘market’ expansion. And traditionally, they have found the ‘risk:return ratio’ in this market unattractive. Since it is not attractive to mainstream banks, this segment of the mar­ket is instead taken over by predatory financial enterprises. Predatory ‘banking’ is one prominent reason why people leave their places of birth for unknown destinations, and one of the gate­ways to illegal exploitation resulting in bonded labour, modern slavery and human trafficking.

Microcredit offered a big breakthrough. It reached the extremely poor people in the remotest places, as well as in city slums. It unexpectedly brought a completely new group of people into the banking world − poor women. It became financially sustainable. It surprised everybody by establishing a long history of very high loan recovery rate across the globe, in rich countries as well as in poor countries.

This encouraged mainstream finance to take a second look at this market segment. Mainstream financial institutions are extending their service-frontier as deep and wide as they can. Yet they face challenges reconciling profit maximization with financial inclusion. Though they are finding ways to profit from serving the poor, these profits may not match returns elsewhere, especially as they struggle to adapt operational practices developed for different client bases – such as requiring access to legal papers and collateral – to these sectors.

Their obligation to owners to maximize profit ends up allocating capital towards those high­er-profit business lines, and away from serving the poor. To remain committed to the poor, a financial institution must have a primary obligation to serve them – not to generate profit, above all else. This may require new regulatory models, supporting social businesses or banks whose interest rates are subject to regulatory approval.

Grameen Bank offers an example. Its original arm in Bangladesh was created under a special law as a bank for the poor. It has been serving the poor for the last 42 years. In doing so it won the Nobel Peace Prize. It made clear the viability of a new model – it does not insist on collateral, credit scores or legal contracts. It does not wait for people to come to the bank; the bank goes to the people. It has over nine million borrowers, 97 per cent women, living in all the 80,000 villages of Bangladesh. The bank meets these 9 million borrowers in 80,000 villages every week to transact its business. It has remained financially self-reliant, strong and sustainable, perhaps because it was not created to serve the profit interests of outside investors, but to serve these people. It is a social business.

Grameen America, a replication in the US, has been operating for the last 10 years. It has over 100,000 borrowers, all women, mostly recent immigrants. It works through 21 financially sustain­able branches in 14 cities. It has lent out over USD 1 billion, with an over-99 per cent repayment rate. The major limit on its growth is access to capital; under existing banking and securities law, it cannot accept public deposits. This points to the limits of the current model, based on our expectation that banks will be profit-oriented institutions.

If we want to slow down and ultimately stop large-scale irregular migration, labour trafficking and modern slavery, we will have to redesign our thinking and create institutions to fit that new thinking. Business as usual will only produce the usual outcomes. We have been on the wrong path – we must change track.

Around the world, microcredit has turned illiterate unemployed rural women into entrepreneurs. Now we are reaching out to unemployed young people through specialized social business venture-capital funds, specialized in financing their start-ups, to turn them into entrepreneurs. Social finance can play a vital role in transforming deteriorating or stagnant rural economies into vibrant economies. This will keep the youth engaged in these societies and economies, and prevent them having to embark on difficult and perilous journeys in search of ‘jobs’. And it will keep them out of the reach of modern slavers and human traffickers.

All of this requires a serious mind-shift. We must look at our rural villages not as suppliers of cheap labour to the centres of capital in cities, but as the engine of the next wave of creative entrepreneurialism and economic growth. Digital technology brings this vision within reach, as the Financial Sector Commission’s report makes clear.

We must mobilize and act now. On the financial front, we must adopt a crisis footing: we must act before it is too late. We must use all our institutional power and leverage. Regulators and law-makers must do all they can to open up new opportunities for social business and to foster entrepreneurialism. Financial sector leaders must work not just to address modern slavery and human trafficking at the margins, but also by rethinking their business models to address the root causes and drivers – including financial exclusion.

The Financial Sector Commission’s Blueprint provides us an important framework for getting start-ed. The Implementation Toolkit will help bring it to life, if financial sector actors take these tools up – and take up the challenge of action. And the rest, we can learn, together, along the way.