Revolutionising Impact: How Social Enterprises Redefine Profit and Purpose
Written by Keon Robert
This piece comes from an E-Lab Entrepreneurship Essay Competition winner from the 2024 competition. For more information about the Essay Competition, and to see the other winning entries, see this overview post.
Bill Drayton, the founder of Ashoka, once declared that “social entrepreneurs are not content to just give a fish or teach how to fish – they would not rest until they have revolutionised the fishing industry”. His social principles diverged significantly from the traditional profit-maximising pursuits of business founders, yet I find there is an element of truth to his words.
Generally speaking, social entrepreneurship uses “market-based methods to solve social problems” (Miller et al., 2012). Like a charity, it seeks to create social value, but it employs commercial techniques to sustain this value creation. Instead of investors or shareholders being rewarded from profits, the surplus benefits accrue primarily to targeted beneficiaries (Austin et al., 2006). This appears to be ethically commendable. Disadvantaged or vulnerable groups are helped out of poverty, and money is still made. Consider the example of Fairtrade. They transform communities and establish recycling initiatives. 1 million people are impacted by their work, 74% of whom are women (Oxfam, n.d.). Yet, they still generate revenue through their certification fees and product premiums.
However, social entrepreneurs also often operate in sectors with low profitability or high risk. This supposedly affirms their business morality by emphasising a greater capacity for compassion over financial gain. I see this to be ambiguous. Entrepreneurial motivators are fundamentally based on self-interest and all enterprises require profit to innovate, to gain economies of scale, and to take risks. They also require the pursuit of status to help advertise the company and to gain greater market share. Successful enterprise needs efficient management; this is often more ruthless than compassionate.
Yet these activities – to innovate, scale, and risk-take – are what enable true social and environmental development. This essay endeavours to show how social entrepreneurship does not neglect profitability for social mission, but rather positions financial growth to foster social growth. Such business models mean that the services offered produce a net positive for society. Revenue is re-invested to enhance this progressive impact.
The role of value proposition
In 1983, Muhammad Yunus founded Grameen Bank in Bangladesh. A pioneering microfinance institution, it provided microloans to impoverished seekers who lacked access to traditional banking services. These loans allowed the bank’s recipients (97% of whom were female) to start or expand their small businesses, hence fostering self-sufficiency. Bangladeshi tradition meant women’s access to loans was restricted (Bernasek, 2003). Grameen Bank changed this: strict company regulations on the size of a prospective borrower’s landholdings ensured only the poorest had access. The firm’s value proposition therefore aimed to eliminate poverty through financial inclusion. For this, Yunus was awarded the Nobel Peace Prize in 2006.
The grassroots approach of Grameen is decentralised and community driven. Its local-chain branches are designed to sit at the heart of whole neighbourhoods which it achieves through its self-selecting “borrower groups”. The social value of Grameen Bank is evident. Grameen Bank also establishes environmental initiatives. Their microcredit programmes allow recipient farmers to transition from chemical-intensive agronomy to organic methods. Their 2023 program, to plant 200 million trees, was part of their efforts to address climate change (grameenbank.org, n.d.), and combat soil erosion. Grameen Shakti, a sister division of the Bank, has installed 1.8 million solar home systems, over 14,300 biogas systems and 172,000 improved cooking stoves in rural Bangladesh (Asif and Barau, 2011). It is clear that their product’s social value is tied to environmental value too.
Hence, the social and ecological impacts of Grameen Bank are apparent. At the same time, its business model means their services are sustainable for the local ecosystem and economy – this is a rarity that only social enterprise can achieve. The difference between charity and social enterprise is that the latter still cares about profit margins. Ultimately, it is this method that has made Grameen Bank successful.
The for-profit model
Grameen Bank provides small loans to impoverished individuals who have inadequate collateral and poor credit history. These borrowers form groups, usually compromising of five members. Although loans are provided to each person, the entire group bears responsibility for everyone’s repayment. This joint liability acts as an incentive for all members to maintain financial discipline. Moreover, these loans are sequentially distributed – typically, two members receive their loan first. It is only upon their repayment that the remaining members receive their loans. Peer pressure acts as the borrower’s collateral.
Albeit at very low rates, Grameen Bank charges interest on their loans to generate revenue. Since their business model results in high repayment rates (often exceeding 95%), there is always a steady flow of capital without reliance on donations or subsidies. In the 2024 financial year, their Net Interest Income was approximately $3.92 billion, and their profit after tax was $1.74 billion (Credit Access Grameen, n.d.). These high margins allow the Bank to diversify their portfolio, accumulate wealth and reduce risk. They now offer savings accounts, insurance products and educational loans. While the social effect of this diversification is implied as positive, this only arises from the complementary pursuit of income stability.
The group lending mechanism is also cost-effective. By dealing with groups instead of individuals, transactions costs are lowered as the Bank can streamline any administration processes. Overhead costs decrease as less ‘field officers’ are required to directly manage client relationships. Thus, economies of scale can be achieved, and profit can be increased.
In traditional enterprises, profit is disbursed as dividends to shareholders. In charities, surplus donations are simply used to fund the same events; there is little innovation upon the types of services they provide. By contrast, in social enterprises, all profit is re-invested back into the company, either to scale up or to innovate. Grameen Bank did this through diversifying their portfolio and opening up over 1,900 branches. For them, increased profit leads to greater positive impacts – there is no trade-off.
Conclusion
The success of Grameen Bank is undeniable. By providing accessible financial services to the poorest in Bangladeshi society, they have promoted sustainable economic development and fostered societal and ecological change. In the words of their founder: “a charity dollar has only one life, a social business dollar can be invested over and over again”. Social enterprise is the embodiment of this.
Original Prompt: Q2. Discuss the concept of social entrepreneurship and its role in addressing social and environmental issues. Analyse, in depth, a successful social enterprise and discuss how it balances the trade-off between profit-making with creating a positive impact.
Bibliography:
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Miller, T.L., Grimes, M.G., Mcmullen, J.S. and Vogus, T.J. (2012). Venturing for Others with Heart and Head: How Compassion Encourages Social Entrepreneurship. The Academy of Management Review, [online] 37(4), pp.616–640. Available at: https://www.jstor.org/stable/23416289 [Accessed 6 Jul. 2024].
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Bernasek, A. (2003). Banking on Social Change: Grameen Bank Lending to Women. International Journal of Politics, Culture, and Society, [online] 16(3), pp.369–385. Available at: https://www.jstor.org/stable/pdf/20020172.pdf
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Asif, M. and Barua, D. (2011). Salient features of the Grameen Shakti renewable energy program. Renewable and Sustainable Energy Reviews, 15(9), pp.5063–5067. doi:https://doi.org/10.1016/j.rser.2011.07.050.
Credit Access Grameen (2023). Completion of 25 years of Inclusive Finance Journey. Available at: https://www.creditaccessgrameen.in/wp-content/uploads/2024/05/CreditAccess-Grameen_Q4-FY24_Result.pdf