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Willy Wonka: Where is fancy bred, in the heart or in the head?

Willy Wonka and the Chocolate Factory – 1971

STANFORD GRADUATE SCHOOL OF BUSINESS—In rural India, a loan of $50 can spell the difference between poverty and economic self-sufficiency for an entire family. Such is the power of microlending, a form of finance that is helping to eradicate poverty in countries all over the world. Vinod Khosla, founding CEO of Sun Microsystems and a partner at the venture capital firm Kleiner Perkins, calls it “one of the most important economic phenomena since the advent of capitalism and Adam Smith.”

Speaking at the conference on Global Business and Global Poverty at Stanford Graduate School of Business, Khosla used the Indian organization SHARE Micro Finance Limited (http://www.sharemicrofin.com/) to illustrate microfinance. SHARE targets rural women in India whose per capita income is less than $8 a month—well below the World Bank poverty line of $30 a month. The organization lends each woman $50 to $100 to fund entrepreneurial projects proposed by the recipients. For example, a woman might open a market tea stall or small grocery or buy a rickshaw or bicycle to transport the wheat grown by her family to market. The rickshaw would allow her family to retain 50 percent of the profits from the wheat that would have gone to pay another transporter. On the high-tech end, some women have opened Internet kiosks that have become profitable within the first three months and have provided a livable wage within six months. “There are hundreds of examples like this,” Khosla said.

In what Khosla calls a “virtuous pyramid scheme,” SHARE lends money to eight-member women’s groups. Because they are all part of the same community, the group members are under strong social pressure not to default. “It’s embarrassing to default, and if one person does, the others have to make up for it,” he said.

In part because of this sense of community, SHARE has an impressive repayment rate on the more than $71 million it has disbursed in more than 3000 villages of India since 1994. Of its 197,000 clients, 77 percent have experienced a significant reduction in poverty over the past four years, and 38 percent are no longer considered poor, statistics representing a snapshot of 10 years since it’s inception, while the positive trends have since continued.

“More important,” said Khosla, “if you talk to these women, they’re empowered. People who are first-time borrowers are always looking down, their head covered with a sari. Anyone who has been borrowing for more than three years looks you straight in the face, eye-to-eye. So a few years of this not only changes their financial status, but also their mental attitude. I have no doubt that this will have all kinds of other consequences.”

What should make microfinance attractive to investors, Khosla said, is that lending organizations such as SHARE operate on strictly commercial terms, make a profit, and are scalable. “For a small amount of equity, such organizations are leveraging a lot of resources, not only in India, but in Pakistan and all over the world,” he noted.

Critics had argued that lending money in $50 increments would be uneconomical and would lead to even greater burdens for the poor. The success of the more than 6,000 institutions doing some form of microfinance today has proven this wrong, said Khosla. “The phenomenon can draw economic resources on a worldwide and competitive basis,” he said.

Khosla urged listeners to join in the movement to remove regulations currently prohibiting microfinance organizations from obtaining necessary credit.

Khosla said his own attitude has come a long way since 1993, when he first went to India to address global poverty and felt overwhelmed by the magnitude of the problem. “It’s taken only a few people to dream the dream of having an impact on half a billion people, and to follow through and start making that happen. It’s tremendously exciting and I think all of you should get involved,” he urged listeners.

It is amazing to think that lending $50 to $100 can make such a huge difference to a single person’s whole life, but this is the reality, and the opportunity that exists with microlending.  In an area where wages are in the neighborhood of $7 per week, you do the math.  You are injecting two months worth of income that can be used to create a business that increases their personal wealth, which increases the quality of life for all those living in the poverty stricken village… for $56 dollars.  And you get paid back.  With a handsome interest rate.  And this is the ultimate form of charity.

Tim Handley