Let's understand social business before trying to trash it
On June 19, 2014, The Daily Star published an op-ed titled “The 'Social Entrepreneurship' Conundrum” written by Ahmad Ibrahim on the subject of social business. I have been connected with the concept of social business -- mostly the academic side of it -- since its inception. I am responding below to some of the writer's arguments.
1. Op-ed's argument: The entrepreneur may have no share of the social business. Even after the investor has received his share of the invested amount as dividend, the investor still owns the business.
Nobin Udykta (NU) is a term used for the son or the daughter of a Grameen Bank borrower, who aspires to create a business and become an entrepreneur. The NU begins the business as a managing partner or a paid manager of the business owned by the investor. The investor recoups the invested money in a certain time period as per agreement with the entrepreneur. Then comes the major responsibility/objective of the investor, which is to transform a job-seeker into a job-giver. The investor's entire purpose of investing in the NU is to establish the young person as an entrepreneur. The investor does this by selling his shares to the entrepreneur following social business guidelines (the guideline is discussed in answering the following arguments).
2. Op-ed's argument: Buying the investor's share to become the owner of the business is a heavy burden for the entrepreneur after having already paid the original invested amount.
In the NU programme, an easy rule has been made to transfer ownership to the entrepreneur. The investor will take an amount equivalent to the original investment amount plus a fixed sum of 20 % over it. For example, if the entrepreneur is paying back the investment amount of Tk. 100, he will have to pay back a total fixed amount of Tk. 120 irrespective of the time it takes to pay back the money. This additional amount is called a “share transfer fee,” according to the social business guideline. The total repayment burden would have been twice or even thrice if the entrepreneur had to borrow the money from a bank.
Here are the justifications of charging that share transfer fee. First of all, to purchase the share of the investor in the NU programme, the entrepreneur is asked to pay the amount equivalent to face value, which is much smaller than the market value in a successful business. Secondly, the investor in this case is an active investor, not a passive one. He provides a lot of services -- he prepares the entrepreneur to become an efficient entrepreneur, trains him, provides guidance and support services, monitors his business performance, and bears the business risk. That fixed share transfer fee for covering all these services over a period of several years is just a modest fee indeed.
3. Op-ed's argument: The NU programme only accepts those whose families already have years of borrowing history with Grameen Bank. There will already be a significant amount of debt for the household. Is it wise to push them onto more debt?
Initially, the NU programme was designed to inspire the sons or daughters of Grameen Bank borrowers to create businesses, with Grameen Bank loans, instead of hunting for jobs. The programme did not pick up speed because parents were reluctant to let their sons or daughters take more loans while they still had the unpaid education loans. Bank staff were also slow in giving them fresh loans because they still had outstanding loans to clear.
The idea of involving the NU programme to “social business” was to shift from loans to equity so that the entrepreneurs do not have to worry about outstanding loans from Grameen Bank. Now, Grameen Bank does not operate nor invest in the NU programme. The investors here are the interested individuals and organisations. The entrepreneur is linked up with social business investors who would invest in their businesses. He pays the investment back over a mutually agreed upon time schedule. This programme has nothing to do with Grameen Bank's loans, so there is no question of being pushed into more debt.
4. Op-ed's argument: If the investor sells his shares at the market value, then he cannot hold on to the extra earning over the face value that he received. This amount has to be reinvested into another social business or the same social business. This is perhaps the biggest loophole in social business programs that will cause lending firms such as Grameen Bank to rake in millions in profit.
If an investor sells his share in a social business at market value, he cannot keep the extra value earned for himself. He must invest that “extra” into a social business fund or into a social business. Surprisingly enough, the writer brings Grameen Bank out of nowhere. Firstly, Grameen Bank has not been an investor in social business; in fact, Grameen Bank has nothing to do with the entire social business process. Secondly, the investor's extra money in this case is invested in a “social business,” not in lending firms! The investor is not keeping the extra or enjoying it anyway!
5. Op-ed's argument: After the investor recoups the original investment, he sells his share to the entrepreneur. With the extra money he receives, he can dive into another social business -- and the cycle can go on and on until Tk. 1 of investment turns into Tk. 1 lakh.
Seems like the writer is considering a social business a money machine for the investor! Unfortunately, he is missing all the points of social business. Again, if the investor sells his share at the market value, he has to reinvest the “additional money” he receives beyond the face value into another social business, or in the same social business. The investor is not making any money.
6. Op-ed's argument: In the NU programme, the investor receives a 20% share transfer fee over the face value of the share. Even if this is free from increasing interest rates on loans, it provides a loophole for a firm to make exponential profit from a small original sum.
The process of selling the investor's share, and the justification of charging the 20% share transfer fee have already been discussed above (please see the response to the op-ed's argument number 2). The increasing interest rates of loan are not applicable here, since the investor will take an amount equivalent to the original investment amount plus additional fixed sum of 20% over it when he sells his share. Where is the “loophole?” Where is the “exponential profit?”
It is very unfortunate that the writer jumped to trash social business without understanding the very fundamentals of it, and created a lot of confusion by bringing references to Grameen Bank, indebtedness, exponential profit, etc., where there is no relevance for these elements in social business.
The writer is Lecturer, School of Business, North South University.
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