In my last blog post, I shared one of my favorite sayings about working with the base of the pyramid: “The poor don’t lack intelligence and initiative, what they lack is money and opportunity.” Here’s another one: “It’s expensive to be poor.” It sounds like an oxymoron, but it’s true, and it’s the key reason why entrepreneurial involvement in majority markets can be so successful.
For example, large supermarkets rarely operate in low-income neighborhoods, meaning residents pay more money at smaller stores for food that’s often of lower quality. Many poor people don’t have bank accounts, meaning that when they do need to cash a check, pay a bill or send money to a relative, they are forced to pay high transaction fees that eat away at their hard-earned funds. These are only a few examples of the countless ways in which the poor pay more and usually get less, or in other words, suffer a “poverty penalty.”
One way that penalty is being addressed in recent years is through microfinance. For years, the conventional wisdom was that offering loans to the poor was not worthwhile, as it would be too risky and the amounts of money involved too insignificant. It turns out that those assumptions are absolutely wrong. Recipients of microloans usually repay their debt at rates nearing 100%, and while the amounts of the loans are usually small, when these projects get up to scale there is such a volume involved that the lenders can do very well.
Indeed, microfinance is among the most profitable, fastest growing, and least risky enterprises in Latin America. How often do you see all those words in the same sentence? The latest IFC/MIF Microscope Index shows that of the 55 countries surveyed, 6 of the world’s 10 best microfinance climates are in Latin America, with Peru and Bolivia at #1 and #2, respectively. Now, microfinance has gone beyond small business loans to branch into other services for the poor: microinsurance, savings accounts, mortgages, and more. Through the success of microfinance and the involvement of major financial institutions, there is now less of a poverty penalty in Latin America when it comes to loans and financial access.
The same would be true for other sectors: food, household and consumer goods, transportation, housing and many more. If the right products are available at the right price, people will happily stop overpaying for inferior products and become loyal customers of the companies that help stop the problem of the poverty penalty.
Donald Terry was manager of the Multilateral Investment Fund from its inception in 1993 until June, 2008. He is currently teaching at Boston University Law School and consulting on remittances to Africa with various international organizations.
