Reason #2
Social contracts & social institutions dominate; not legal contracts & mature institutions.
In mature economies, bargains struck between two parties are recorded in contractual documents which set out each party’s rights and obligations under the contract. Failure to comply with contractual obligations can result in the injured party seeking redress in the courts of law which by enlarge are accessible; affordable and independent. This is simply not the way it works in emerging countries. Most likely, if a contract is signed, it is put in a drawer to gather dust. Seeking redress in the courts of law for breach of contractual obligations is not for the faint-hearted with average length of judicial proceedings being 8 years (See Rule of Law Index). Not only that, justice in such countries is often not accessible, not affordable and not fair. This is just one example of what sociologists call “institutional voids”[i]. Other examples of institutional voids include non-existence of established capital markets; an uneducated/unskilled and disorganized workforce; and lack of proper infrastructure. These institutional voids are the main reasons why social contracts and social institutions dominate in the emerging markets. Social contracts are the beliefs; unwritten rules of behavior; familial ties; social and moral norms of a given community. The social institutions are the social hierarchy as promoted by traditional and religious leaders in these communities. This is not the usual environment in which multinational corporations thrive. It is too unpredictable, too esoteric. NGOs are in a unique position to assist big business to bridge their knowledge gaps and to mitigate risk because they have usually spent many years at the grassroots level in these communities. Without their type of social embeddedness, any venture, business or otherwise is likely to fail in these communities. Good examples of success in NGO and big business partnerships include Grameen Bank and Danone in Bangladesh; Unilever in India; Vodafone and Faulu in Kenya.
Vodafone and Faulu’s collaboration in Kenya makes for an interesting case study. In 2005, Africa added almost 15 million new mobile phone subscribers. This was equivalent to the total number of fixed and mobile telephone subscribers in the continent 1996 (take-up soared by 550% in five years according to Guardian Unlimited research) .”The mobile phone revolution continues,” says a recent UN report charting the phenomenon that has transformed commerce, healthcare and social lives across the planet. Mobile subscriptions in Africa rose from 54m to almost 350m between 2003 and 2008, the quickest growth in the world.
Uganda, the first African country to have more mobiles than fixed telephones, is cited in the report as an example of cultural and economic transformation. Penetration has risen from 0.2% in 1995 to 23% in 2008, with operators making huge investments in infrastructure, particularly in rural areas. Given their low incomes, only about a quarter of Ugandans have a mobile subscription, but street vendors offer mobile access on a per-call basis. They also invite those without access to electricity to charge their phones using car batteries. A great example of how entrepreneurs in the informal sector are responding to the local needs of the markets they serve. But I digress.
Compared with mobile telephone penetration, the reach of the retail banking system in most African countries is very low. This was the need that Vodafone sought to address in its venture with Faulu. They aimed to fill the void created by the lack of banking infrastructure in these regions, by using mobile technology to bring the economic advantages of having a bank account to those with small, irregular or cyclical incomes, essentially, the informal sector. The mobile phone and SIM card stand in for the bank card and instead ATM machine services are provided by airtime resellers. Faulu’s involvement in this venture was instrumental to its success. Faulu provided local expertise to design and test a micro-payment platform called M-PESA. M-PESA allows customers to use their phone like a bank account and debit card. The customer credits their account at their local air-time dealer and can then transfer the value to another person’s phone or use it to make a loan repayment or redeem it as cash. The project successfully demonstrated that technology could be used to disburse loans from a micro-finance company to its clients and then to collect repayments via designated mobile phone airtime agents. Pooled M-PESA balances were held at a Kenyan bank. Through the project, existing microfinance clients received a cell phone through which they could electronically make payments on their loans. Several services were available in addition to loan repayments; users were able to deposit or withdraw cash from authorized M-PESA agents, typically a small store owner. Clients were also able to make person-to-person money transfers, purchase airtime for re-sale or personal use, and receive statements.
The impact of this venture has been transformative. M-PESA has enabled 1 million Kenyans to regularly transfer money using their mobile phones at a cost of just $0.06 per transaction. The system reduced the time it took to repay the Faulu loans as the transaction and the confirmation of payment is instant. This saved time and money by reducing users visits to the bank and was an added convenience. The scheme meant there was no need to carry around large amounts of cash and improved the security of users’ money.
This is why the M-PESA venture is such a great example of how collaboration between non-traditional partners (in this case a telecom multinational and a local micro finance NGO) can meet the needs of consumers at the bottom-of-the-pyramid and simultaneously turn a healthy profit. A true “win-win” result for all concerned.
[i] Ref: Khanna & Palepu 1997
