By Manoj Akmeemana
Adam Smith’s Sympathy vs. BOP Reality
Today, in the era of the new economy, switching on to the digitalized audio–visual world will echo so much talk about economic development, poverty eradication and socio–economic inequalities. Philip Kotler vividly elaborated, that the globalized economy is prone to change every nanosecond - becoming highly digitized, inter-connected, more disintermediated, and with convergence of different industries. He so rightly said, “The future is not ahead of us. It has already happened. Unfortunately it is unequally distributed among companies, industries and nations.”
It is doubtable as to how many of the people who advocate and promote a market economy know of the real sense he had quoted above. In this sense, Adam Smith was absolutely right and if he had been here today, he would be astonished to see all the fancies available in a “throwaway society”!
The irony is that the digitized world provides innumerous products and luxuries that only a few could afford, irrespective of the real need. The masses on the other hand would not even dare window shopping at the modern shopping malls. However, one may argue that without induced demand, there wouldn’t be growth to elevate and improve the lives of those who really deserve.
But is this the reality?
End of World War II, saw World Bank, various donor nations, aid agencies and national governments fighting for the eradication of poverty. Yet, five decades into the 21st century “Poverty Reduction” has remained a top priority of the United Nations Millennium Development goals. Ironically even the latest report on Human Development titled “Beyond Scarcity, Power, Poverty and the Global Crisis” (of 2006), by UNDP, reports of millions of people who are denied their fundamental human needs to water, education and basic infrastructure.
I would say Adam Smith is the most quoted yet the least read economist; in his work the “Theory of Moral Sentiment” and he argued that “sympathy” for others (i.e. poor) was the basis of any civilized society. But a society fuelled and motivated by greed to create and accumulate wealth would not have any sympathy for others that are unseen or unknown. So we in this world of despair, disorder, inequality and definitely uncertainty, are trying to figure out how to eradicate poverty and improve living standards of over 4 billion people earning less than $2 a day!
These are the very people known as the Bottom of the Pyramid (BOP) - the subject matter for us the more fortunate bankers, will have to deal with, not on sympathy or philanthropies, but because the very future survival of bankers depends on them.
Many economists made their own attempts to solve the problem of poverty. Yet the attempts are far behind success and confined to intellectual debates and interests.
But I would argue in this world of the modern order of business “Small is not so beautiful”, since in the eyes of the investor, “being big is not seen as ugly”. Today we observe many businesses becoming bigger and bigger, through organic growth and mergers and acquisitions. This phenomenon is a reality for all industries – from FMCG to financial services.
Being so close to capital (funds) the problems that lie in front of us bankers is to have a new approach to cater to the BOP segment. Instead of adopting a “sympathetic approach”, a more “empathetic approach” is needed to usher a sustainable Win–Win solution for all stakeholders, in the business world. Especially the Sri Lankan banking community need to focus on this market segment since 42% of its population falls under this category. They all have to re-think their traditional strategic approaches, business models and applications “to stay alive” in this globalized business world.
Beyond the intellectual utopias
The links between economic growth and financial markets are a century old topic of debate for academia and policy makers. Schumpeter (1934) argued that financial development leads to economic growth. He observed that financial markets play a dominant role in the growth process channelling funds to the most efficient investors and fostering entrepreneurial innovation. However, J. Robinson (1952) viewed the situation contrary to Schumpeter and argued that financial development passively follows economic growth by responding to the increasing demand for funds due to the economic prosperity. This debate is yet to be settled among economists as well as modern policy makers!
Having said that, inspite of all these intellectual interesting arguments, we being practical bankers close to capital (funding) as well as people, have experienced what proper financing could do to small businessmen or entrepreneurs. Most of us have had the joyful pride of contributing to the elevation of a small business or an individual and see them grow into larger business organization or sometimes into an international business outfit. These practical and dynamic experiences of bankers are much stronger than any empirical debate on economic theory by economists and policy makers. Infact recent empirical studies support our above proposition which suggests that deeper broader and better functioning financial markets can stimulate higher economic growth at macro level (Levine 1997).
However the real challenge is at micro level where business is really happening. Catering to the BOP in a business perspective, appreciating the Risk and Rewards is a challenging task to any industry. In this market economy nothing is “free”, and sustainable growth and creating shareholder value are essential prerequisites. C. K. Prahalad, observed that success formulas to win the potential market segment of BOP should have “A better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win – win scenarios where the poor are actively suggested and at the same time, the companies providing products and services to them are profitable”.
Myths and realities of the BOP, A Sri Lankan perspective Are the poor really poor?
Does the BOP have money and purchasing power? According to Prahalad the dominant assumption is that poor have no purchasing power and therefore do not represent a visible market. Yet he argued that there is more evidence contrary to this myth all over the world. Research has revealed that the current income is $3.35 per day in Brazil, $2.11 in China, $1.89 in Ghana and $ 1.56 in India. Yet together they have substantial purchasing power which constitutes to a $ 5 trillion global consumer market!
Population earning less than $ 2 per day in Sri Lankan is 42% and no business can ignore the aggregate demand in them. However, the US Dollar is not a proper measurement of purchasing power in the local context considering the various socio economic realities in the various societies.
There are disparities seen in the same economy in many countries all over the world. Urban and rural disparities are predominant. Sometimes the economic power is concentrated in a single geographical area. Often the BOP being in a high–cost eco-system, even in developing countries are compelled to pay a premium for everything. Prahalad called it “Poverty penalty” which is due to local monopolies, inadequate access, poor distribution and strong traditional intermediation.
The World Bank survey done in 2005, supports the above argument and shows the disparity among rural and urban society in the Sri Lankan economy.
Ironically it is the rural society that provides much needed funding to the western province making them less poor and a main contributor to the national economy. Yet it is observed that the poor have to pay more or even a premium for financing as well as other needs!
The rural sector as well as the poor in the western province are using informal, non–institutional sector for financing needs. Many studies have revealed that costs of funds are substantially higher in the informal sector comparative to the formal sector.
Yet the banking sector has so far not been capable of attracting these segments to the formal institutional sector, as a result of the conventional business strategies and models.
Therefore, traditional financial institutions and especially bankers have failed to penetrate this market, profitably for the shareholder whilst safeguarding the depositor.
Are the Poor averse to New Technology?
Another popular belief is that the poor (BOP) are averse to advanced technology. However, many global, regional as well as local examples indicate that BOP consumers accept and welcome advanced technology. A good example is from our neighboring Indian conglomerate ITC that connected Indian farmers with the market through personal computers in their villages. They called it E-Chopal (It is similar to a Sri Lankan Kopi Kade in the villages). E-Chopal network allowed farmers to access the Chicago wheat prices and make their sales more profitable. Now it is said that this concept has been extended to provide the information on weather conditions, various deceases and remedies for farmers. Indian farmers are now ready to buy their own Personal computers!
In Sri Lanka, Dialog, a major mobile operator generates 80% of its income from outside the western province according to a presentation by its CEO. Dialog utilizes the existing widespread boutiques as franchise for their mobile re-loading facility. It shows that BOP are connected and networked. It is expected that by 2008 the telecommunication market penetration will increase from 35% to 75% in Sri Lanka.
It is observed that despite the rapid growth in telecommunication and innovative wireless technology (CDMA), Sri Lankan financial institutions are concentrated more in western province and fiercely competing with each other for the same pie!
The increase in access to banking may mislead one, unless we really see where the resources are concentrated. The financial industry concentration is a major indicator to judge whether they have substantially penetrated the BOP. It is clear that macro development in the county in near future will be very remote unless concentrated and focus attempts are made by policy makers and private sector on the BOP.
Even though Sri Lanka has a substantially sophisticated financial industry compared to neighboring counterparts and most developing countries, it has not yet been able to use new technology as a strategic tool to penetrate the BOP markets.
Migrant worker remittances are one of the highest foreign inflows to Sri Lanka, and yet a substantial amount of remittances are routed through informal sources to residents in Sri Lanka due to higher cost, time duration and less accessibility provided by the formal banking sector. Having seen the huge potential in this area some of the local banks and state owned national savings banks have gone to remittance business more aggressively. However traditional mode of remittances such as drafts and telegraphic transfers are inefficient compared to e-remittances, in terms of speed.
Are the Poor receptive to Brand?
Another dominant assumption is that the poor are not brand conscious. But according to the research the poor are very brand conscious and also extremely value conscious. Today it is important to understand that consumers are not “mere consumers” or “Users” of products, they have to be understood as experiences and communicators (Liyanage). Much is being talked about Branding and consumer behaviors globally, but there are very few researches done on the Sri Lankan consumer. One such researcher, Liyanage argues that, “although consumption is fast replacing occupation as the chief determinant of one’s status in society, the traditional belief and value systems are very much intact and are only changing slowly, rather than radically”.
Therefore by consumption of specific products, consumers relate themselves; wanting to experience “the luxuries” of the middle and upper societies and communicate something back to the society that they lives in order to be recognized in their “social status”. The BOP specially being in the lower spectrum of the society, are brand conscious and wish to elevate their status in the society through “experiences” as well as “communicators” The Sri Lankan banking industry should understand this reality when serving the BOP. Unfortunately, lack of insight and the many myths on BOP have been lead to the isolation of the BOP from the formal institutional financial sectors denying the bankers the opportunity of tapping a larger market segment. Reintroducing products tested for success in the Western World would not help capture the BOP, and Sri Lankan bankers need to be more creative in their approach with innovative products that will easily capture the hearts and minds of masses. This cannot be achieved overnight – more research and effort is needed.
Are the Poor Asset less?
In Sri Lanka, most of the BOP belongs to rural areas and their consumption patterns, resource structures and behaviors differentiate them from urban markets. Therefore to access the BOP primarily the capacity to consume should be created.
The Sri Lankan BOP is not asset-less. They have their asset base in terms of land and estates but unfortunately due to legal constraints, these assets can not be converted to capital readily. Most rural lands are not acceptable to banks because of issues with titles and becoming a hindrance as collateral for lending purposes. This problem is almost common to all the BOP consumers in world wide.
According to the Heranando De Soto, the World’s poor have assets worth $ 9.3 trillion in real estate assets alone, which cannot be converted to capital due to legal barriers and related higher costs. De Soto strongly argued that capitalism failed due to a lack in a system to convert the majority’s assets to capital.
Creative Inclusion
As Bankers, we are in the midst of challenges created by globalized economic paradigms and BOP realities. BOP market is largely untapped. For decades, bankers were responsible for transferring capital to different economic activities calling themselves the “Life blood of the economy” in self-glorification. It is a fact that there is a huge gap between conventional banking system and the BOP markets. This Gap cannot be bridged by the conventional approach in the traditional banking system and demands new strategic approaches, new business models and most importantly, a new mind set.
Therefore we proposed a new business model to tap the BOP market specially in Sri Lanka which we call the “Model of Creative Inclusion”. Even though this model is designed to meet the Sri Lankan socio-economic realities, it may be applied to most other developing nations too. However the model does not provide a final judgment nor can be considered as “The solution”. It provides only a Platform for Sri Lankan bankers to unleash their full potential.
Rapid development in Telecommunication, specially in mobile and CDMA phones, banking institutions have to re – create their business models to penetrate into BOP market.
Banking institutions can be operated in major geographical location in rural areas of the country build clustering business outlets by franchising the mobilizing of deposits and payments via local boutiques. The much needed connectivity and authentication can be done through telecom operators, where technology can be simple and affordable. Of course proper control mechanisms should be an integral part of this novel approach. Therefore partnering with civil society organizations is a pre-requisite.
Manoj Akmeemana is the Senior Manager Strategic Planning at Sampath Bank PLC., and holds a Masters Degree in Business Administration (MBA) from the Postgraduate Institute of Management, University of Sri Jayawardenapura and obtained his first special degree in Business Administration from the University of Sri Jaywardenapura. He is a Chartered Marketer of the Chartered Institute of Marketing, UK, and a Certified Management Accountant (CMA) of the Certified Management Accountants (CMA), Australia.
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