Dead end for social entrepreneurs unless industries mobilise

Philanthropists are getting behind social enterprise. But few market-based solutions have been able to achieve significant scale relative to the problems they seek to address. Irfan Ahmed and Nidhi Hegde of Monitor Inclusive Markets offer new research that shows scale is possible when multiple actors across industries act to overcome stubborn barriers.

When around 116 million households in India do not have access to adequate sanitation, the solution needs to provide millions of toilets, not thousands. And with over 600 million people in Africa living below the poverty line, solutions need to scale to impact as many millions of them as possible, not just thousands.  

Social enterprises (or market-based solutions, as we tend to call them) hold tremendous potential to positively impact the lives of those suffering the consequences of poverty, and philanthropy has a key role to play in realizing this potential. But, market-based solutions, and the philanthropy that supports them, will only be truly impactful when the challenge of scale is properly addressed. 

As an organization dedicated to helping catalyze market-based solutions, the emergence of innovative new business models across sectors like healthcare, financial inclusion, education and many more has been extremely encouraging. The great disappointment, however, is how few of these market-based solutions have been able to achieve significant scale relative to the problems they seek to address. In our 2011 survey of 439 such firms in Africa, we found that a mere 13% were at scale.

We need the power of philanthropy to move beyond supporting entrepreneurs alone, to facilitating whole industries and accelerating them to scale

It is clear to us, both from our own work with market-based solutions and through our research into others that in most cases scale is not just dependent on the firm. It often cannot be achieved unless those who support market-based solutions intervene to help them overcome stubborn scaling barriers that lie both within and beyond the firm. These barriers are faced by all the firms in the industry and we think they can be classified as relating to either the value chain, the provision of public goods or government laws and regulations. A few examples from the field can help illustrate what we mean by this. 

Big opportunity for low income housing in urban India

Our own journey in this space began with low-income housing in urban India. While our analysis revealed a strong business opportunity in selling high-quality affordable houses to low-income customers, there was little interest from large housing developers. We spent the first few years developing the business model, and promoting the idea to existing and potential developers. When the first developers came on board, it seemed that the industry was poised for growth. 

However, we also found that a key piece of the value chain was missing - housing finance for customers working in the informal sector. Street vendors, rickshaw drivers, owners of small shops and workshops were a segment banks were unwilling to lend to. Unable to get mortgages, they could not purchase these new homes. So Monitor Inclusive Markets worked with our partners to help develop an alternative housing finance model. Today, there are ten housing finance companies providing over $160 million in loans to low-income customers, helping realize the dream of owning a home. 

The role of actors, who might not necessarily be participants in the industry themselves, to help overcome stubborn scaling barriers outside the firm – a practice that we have termed industry facilitation – continued to resonate as we researched case-studies from across Asia and Africa for our new report Beyond the Pioneer.

Overcoming barriers to scale in microfinance

In the case of the Indian Microfinance Industry (MFI)- which we present in-depth in the report - a key scaling barrier was an interest rate cap which had originally been intended for bank loans under $4,000 but was now being applied to MFIs, effectively making the model commercially unsustainable. Once again this barrier, which lay at the level of the government, was not one that an individual MFI could overcome. Recognizing this, Friends of Women’s World Banking and some MFI leaders came together to form an industry association named Sa-Dhan, and through Sa-Dhan successfully lobbied for a change in the regulation. Today, Indian MFIs are providing $5 billion in loans to 33.8 million borrowers.

Growing the clean cookstoves industry

The clean cookstoves industry, which aims to rid homes of indoor air pollution in India, has not achieved the same impressive scale as some of the other industries we highlight in the report. But it is an excellent illustration of how market-based solutions are often deprived of key public goods that are essential for them to achieve scale. In this case, clean cookstoves faced a common barrier faced by many socially beneficial products. Customers were not aware of the problem i.e. indoor air pollution and consequently did not appreciate the benefits of clean cookstoves as a solution. The cost and effort that needed to be invested in educating customers about the intangible health benefits of using a clean cookstove were proving to be a major scaling barrier for this market-based solution. 

Shell Foundation - a key facilitator of the industry - has been working to address this challenge through pilot awareness campaigns and by sharing lessons from the field on effective social marketing techniques. Thanks largely to their efforts, marketing strategies in the industry have begun to change in important ways, including a shift towards gender specific messaging and the use of MFIs as a channel through which to effectively reach captive audiences. 

Each of the case studies in our report illustrates the clear need for industry facilitation to address not one but multiple barriers at different levels to accelerate the scaling of market-based solutions. They are often the barriers that firms either cannot or will not address on their own, and yet can be the difference between having meaningful impact and being just an encouraging idea. We believe in the power of market-based solutions to benefit millions if not billions, and help to change the world for the better. In order to achieve that, we need the power of philanthropy to move beyond supporting entrepreneurs alone, to facilitating whole industries and accelerating them to scale.

To learn more about scaling barriers for market-based solutions, and what can be done to help overcome them, read the report Beyond the Pioneer: Getting Inclusive Industries to Scale.

This article was co-authored by Nidhi Hegde, manager at Monitor Deloitte and co-author of Beyond the Pioneer and Ahmed Irfan, senior consultant at Monitor Deloitte.