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Power of Social Business in Poverty Alleviation

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POWER OF SOCIAL BUSINESS IN
POVERTY ALLEVIATION
F-532: Business Research Methodology and Econometrics

Submitted to,

Dr. M. Jahangir Alam Chowdhury
Professor,
Department of Finance
University of Dhaka

Submitted by,

Md. Rased Mosarraf

MBA ID No.: 16-469
BBA ID No.: 16-062
MBA, 16th Batch
Department of Finance
University of Dhaka

“Poverty does not belong in civilized human society. Its proper place is in a museum. That's where it will be.” –Dr. Muhammad Yunus

Date of Submission: July 19, 2016

i

Letter of Transmittal
July 19, 2016
Dr. M. Jahangir Alam Chowdhury
Professor,
Department of Finance
University of Dhaka

Subject: Submission of Research Paper.

Dear Sir,
I am very glad to submit you the paper on “Power of Social Business in Poverty Alleviation”. I would like to say that this paper is helpful for me to know about the social business concept. I am very thankful to you for giving us such a fantastic opportunity to make a paper on this topic.

I have tried my best to make this report meaningful by providing necessary information.

Yours sincerely,
…………………………
(Md. Rased Mosarraf)
MBA Roll: 16-469
BBA Roll: 16-062
Department of Finance
University of Dhaka

ii

Table of Contents
Introduction ................................................................................................................................................. 1
Literature Review ....................................................................................................................................... 2
What is a Social Business? ......................................................................................................................... 3
Types of Social Businesses .......................................................................................................................... 3
Seven Principles of Social Business ........................................................................................................... 5
Social Business Model vs. Traditional Business Model ........................................................................... 6
Implications of Social Business for Social Welfare .................................................................................. 7
Social Business in Bangladesh.................................................................................................................... 8
Limitations and Criticism ........................................................................................................................ 11
Poverty Situation in Bangladesh and the Scope of Social Business ...................................................... 12
Conclusion ................................................................................................................................................. 12
References .................................................................................................................................................. 13

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Abstract: Poverty is one of the major problems around the world. Prof. Dr. Muhammad Yunus has come up with an idea to solve that problem by introducing the social business concept which emphasizes a combined and organized effort of poverty alleviation through self-sustaining business mechanism. This paper attempts to overview of the idea, discuss current practice of social business in Bangladesh; and compare social business model with other existing business models.

Introduction
The present world is dominated by free market concept. The free market concept comes from the capitalist economy. The profit maximizing motive is consistent with capitalist economy which is largely responsible for increasing poverty all over the world. In this situation, the United Nations
Development Program (UNDP) in 2000 set number goal of halving extreme poverty (the proportion of people living on less than $1 per day) by 2015. More than a decade has passed since declaration. But still 1 billion is in the pool of extreme poverty. Under the traditional capitalism corporate social responsibility is emerged in order to enable it to protect the interest of the poor people as well as profit earning activities. But CSR is not regarded as effective instrument in removing poverty from society, country as well as from the world. Because companies are not sincere about their CSR activities. They don’t pay much more attention to this. They use it as a weapon for increasing their profit. The government can provide products and services to the poor people at lower prices without any profit motive to fulfill social objective like poverty alleviation but government alone cannot solve all the societal problems. The NGOs run by developed countries can help to alleviate poverty in developing countries. But these NGOs are run through charity, aids and donations. Without donations and charity NGOs become ineffective. In view of these problems, the necessity for social business increases in the developing countries. Purpose of social business is to achieve one or more social objectives through the operation of the company through sustainability, no personal gain is desired by the investors. The motto of this type of business is to increase the economic condition of the poor people of the society as a whole.

1

Literature Review
The Social Business is a very recent concept. So it does not include sufficient studies upon which the paper can be prepared.
Bylund and Mondelli (2009) have marked that free-riding is one of the problems in the evolution of social business. They are not satisfied that social business is not a widely observed phenomenon because of a weaker incentive to minimize cost and maximize output. They term social business as a very difficult enterprise.
Wimmer (2012 at the time of analyzing the activities of Grameen Shakti, describes how a social business can change the daily lives of rural population. She sees the sense of responsibility to the society as the driving force of such a business company. She posits positive outlook regarding the social businesses.
Referring to the aspects of public health, Donaldson (2011) analyze the reasons why social business represents an important area of consideration for public policy given the limits of traditional businesses. He observed that social businesses in the health care contexts as well as in the non-health care contexts can have a considerable impact on health and overall wellbeing.
According to Sattar (2012), social business wheels the pursuit of profit maximization and hence gives some relief from the capitalist system.

This study attempts to discuss the overview of the idea, current practice of social business in
Bangladesh and comparison of social business model with other existing business models.

 To evaluate the social business scenario in Bangladesh; and
 To identify some limitations and criticism of social business concept.

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What is a Social Business?
A social business is defined as a business entity which is run on the basis of “non-loss-nondividend” motive and the ultimate goal of which is to solve social problems especially those related to poverty. In Yunus‟ words, “A social business is designed and operated as a business enterprise, with products, services, customers, markets, expenses, and revenues. It is a no loss, no dividend, self-sustaining company that sells goods or services and payback investments to its owners, but whose primary purpose is to serve society and improve the lot of the poor”. (Yunus and Weber
2007b)
A Social Business can roughly be characterized by the following properties:
 It is not primarily a charitable organization, but a competitive enterprise.
 It needs to recover its full costs in order to achieve self-sustainability.
 The owner never receives any profits/dividends. He, however, is entitled to get back his invested amount only.
 Profit can be reinvested to expand the business. It can also be passed on to target group such as poor people by lowering price and providing better service.
 A social business aims at maximizing social benefits instead of profit. It tries to achieve social objectives rather than personal gain.
World renowned weekly business magazine Business Week commented on social business this way, “……Yunus goes beyond microcredit to pioneer the idea of social business- a completely new way to use the creative vibrancy of business to tackle social problems from poverty and pollution to inadequate health care and lack of education. Yunus’s “Next Big Idea” offers a pioneering model for nothing less than a new, more humane form of capitalism.” (Yunus and
Weber 2007b)

Types of Social Businesses
Yunus classified social business into two types on the basis of its construct (Yunus and Weber
2007a). They are Type I and Type II.

Type I: This type includes those companies that are established with a view to achieving a specific social, ethical or environmental goal through providing goods or services at a price easily reachable

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by the members of the target group. Grameen Danone, a yogurt producing company operating in
Bangladesh, may be given as an appropriate example of Type I company. It has been established with the particular objective of solving nutrition problem in the rural area among the poor population. The yogurt it produces has high content of vitamins and other nutritional elements.
The price of yogurt is set at a level just enough to recover the cost excluding entrepreneurs‟ profit and thus enabling poor parents to meet their children’s nutritional need.

Type II: This type of business is run by the poor people and they are owners of this type of business. Although business is operated on traditional basis under this framework. While in Type
I case poor people enjoy the benefits by acting as buyers, in the Type II case they gain the benefits by playing role of sellers. Grameen Bank may be set in place as an example of Type II Company, because it is predominantly owned by thousands of poor. However, the Grameen Bank also has characteristics of Type I. Since its inception it has been extending credit facilities to the underprivileged who otherwise would have been with little opportunity to access in the credit markets. Social Business versus Profit Maximizing Business (PMB) and Not-for-profit Organizations
There are both similarities and dissimilarities between social business, PMB and not-for-profit organizations. A comparison is made in Table-1.
Basis of comparison Profit maximizing business Profit equation Economic profit equation exists.

Dividend distribution Not-for-profit organizations Dividend is distributed to owners or shareholders Social responsibility No responsibility to fulfill social objectives except some legally non- mandatory CSR.

No economic profit equation No dividend is distributed. Objective is only to fulfill social goals.

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Social business

Economic profit equation exists.
No dividend is distributed to owner beyond the capital invested.
Main objective is to fulfill social goals and objectives.

Return of capital Selfsustainability

Driving factor Owners and financiers of the business
Competition

Main concern Capital is returned to the owners and shareholders No return of capital

Dependency on charities and donations Self-sustainability must be ensured.

Profit driven business Social welfare driven business

Capital is returned to the owners and shareholders. Self-sustainability must be maintained.

Social welfare driven business

Owned and financed by shareholders Owned by none but financed by donors

Owned and financed by borrowers

Competition is prevalent among firms.

No competition with one another.

Competition among firms is possible. Only concerned about shareholders‟ profit maximization Only concerned about social profit maximization Concerned about social profit maximization as well as recovery of full cost Seven Principles of Social Business
With a view to establishing and running a social business company, certain standards and norms must be maintained and followed towards reaching the intended social goals. Dr. Muhammad
Yunus and Hans Reitz, the co-founder of Grameen Creative Lab, figured out seven principles to follow (Yunus and Weber 2010):
 Business objective will be to overcome poverty, or one or more problems (such as education, health, technology access, and environment) which threaten people and society; not profit maximization.
 Financial and economic sustainability

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 Investors get back their investment amount only. No dividend is given beyond investment money  When investment amount is paid back, company profit stays with the company for expansion and improvement
 Gender sensitive and environmentally conscious
 Workforce gets market wage with better working conditions
 Do it with joy.

Social Business Model vs. Traditional Business Model
In the conventional framework of business, a successful business model consists of three components. They are value proposition, value constellation and profit equation. Business model in the social framework has also three components. But here the structures of the components are somewhat different. In case of social business model profit equation is categorized into two sub components such as economic profit equation and social profit equation. This classification is made to incorporate broad range of stakeholders and to consider environmental and other social issues. Moreover, the economic profit equation targets only full recovery of cost and capital, and not financial profit maximization. Figure 1 and 2 may be helpful in understanding the difference between the components‟ structure of traditional and social business model.

Value constellation
Internal value chain
External value chain

Value proposition
Customer
Product/service

Profit equation
Sales revenue
Cost structure
Capital employed
Figure 1: Components of traditional business model

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Social profit equation
Nutritional profit
Employment profit
Environmental profit

Value constellation
Internal value chain
External value chain

Value proposition
Customer
Product/service

Economic profit equation
Sales revenue
Cost structure
Capital employed
No economic loss
Full recovery of capital
Figure 2: Components of social business model

Implications of Social Business for Social Welfare
Upon which the social business is formed is the welfare of the society as well as poor people.
There is consistency between real life social business and theoretical discussion. Some of the reasons for which we can say social business plays crucial role in alleviating poverty from the society as a whole are discussed below:

Poverty alleviation: Removing poverty from society as well as from the country is the final goal of the social business. We have already discussed about the two types of social business. First one increases the living standard of poor people by purchasing basic needs at a reachable price. On the other hand, type 2 focuses on making them self-reliant and self-entrepreneurs by being owners of the business organizations.

Employment generation: Social business can create huge employment opportunities for the people of the society through supply channels, production and distribution channels. From making

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products up to reaching products to the customers need people to complete the process. By the construction of the model poor people will get the priority in the recruitment process of a social business company.

Low price goods and services for the poor: Social business is supposed to provide low price goods and services such as education, food, nutrition, sanitation, technology etc. Lower price may become the main competitive advantage of the social business.

Protecting environment: In the seven principles of social business, it is urged to be serious about the environmental pollution. Environment is severely hampered in case of doing conventional businesses. So in the guideline of social business, it is urged to follow the policies which will be the best interest of the society and environment. As a result, the economy will produce more products without harming the environment.

Health care for poor: One of the reasons for our extreme poverty is that the poor have to sell their last resort for treatment. There are government efforts to provide free or low cost treatment but these are insufficient. So, many poor people either die or lose even their last resort. Social business may be of great help in ensuring health care for all those who are below poverty line.

Removing social unrest: Unemployment and poverty are the major sources of social unrest.
Thus, fulfilling basic needs and generating employment social business can fix the problem of social unrest.

Social Business in Bangladesh
There are six companies in Bangladesh which have been established as social businesses under the direct supervision of Dr. Muhammad Yunus. They are namely Grameen Danone, Grameen
Veolia, BASF Grameen, Grameen Intel, Grameen GC Eye Care Hospital, Grameen Bank. These companies are producing yogurt, water, mosquito net, IT product and eye care services, and micro credit respectively. Table2 illustrates the facts and social impacts of these companies.

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Table-2: Social business companies in Bangladesh: their activities and social impacts
Company

Activities

Social Impacts

Ownership: 90% by the borrowers, 10% by the government Launching date: October
1983
Product: Microcredit with no
Grameen
collateral and minimum paper
Bank
works
Special feature: Bank officials goes to the borrower directly and monitors the loans how loan is utilized Ownership: Grameen group
50%
and French Group
Danone 50%
Grameen
Launching date: late 2006
Danone Food Product: Yogurt
Limited
Special feature: Uses solar and biogas energy

Grameen GC
Eye Care
Hospital

Ownership:
Grameen
group and The Green
Children
Launching date: May 2008
Product:
Eye care especially cataract operation
Special feature: Charges patients according to their ability to pay

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 Vicious circle of poverty started breaking. 64% of the borrowers who have been with the bank for 5 years or more have crossed the poverty line.
 Huge self-employment by the poor people has taken place.  Poor parents now have low cost solution to the malnutrition problem of their children.
 Many including Grameen members got employed

 Preventing blindness
 Employment generation

GrameenVeolia Water
Limited

Grameen BASF

Grameen Intel

Ownership:
Grameen
Healthcare Services and
Veolia
Water
Ltd.
Launching date: March
2008
Product:
Pure
drinking water Special feature: Treats surface water according to WHO standard  Elimination of water transmitted diseases and arsenic related disease
 Employment generation

Ownership:
Grameen
group and BASF SE
Germany Launching date:
March 2009 Product:
Impregnated mosquito net, micronutrient sachets
Special feature: Provides high quality products at low cost  Protecting the poor from mosquito transmitted deadly diseases
 Providing essential nutrients for the poor
 Employment generation

Ownership: Grameen Trust and Intel
Launching date: 2009
Product:
Information communication technology
(ICT) solution to health and agriculture related problems
Special
feature:
Digital
solutions in remote rural areas.

 Most advanced solution to health and agriculture related problems with minimal time and reachable cost
 Employment generation

Source: Information collected from http://www.muhammadyunus.org/

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Limitations and Criticism
Motivational factor: Yunus said, “Social passion motivates an entrepreneur to run a social business”. But social passion is not a regular phenomenon rather can be seen as accident. Only the social passion is not enough to run a social business. The depth of the social passion makes a man entrepreneur to run a social business.

Performance Measurement Criteria: The main purpose of social business is to achieve the societal goals. But it is not clear to measure performance of this business. As there are some qualitative data in this objective. Besides, no concrete tools are used performance measuring criteria. So it is difficult to measure qualitative data in consideration.

Free Riding Problem: We know that social business is run for the betterment of the society as a whole. So it is public goods in nature. So each and every company should compete with each other in a cooperative manner to bring about social improvement. But it is well known that public good as well as group action without individual interest generally involves free-riding problem.

Time Value of Money: In social business, the owner who invests the fund is paid back only the original amount after a specific time period and he is not entitled to get any profit. But as there is no consideration of time value of money the owner may bound to bear loss.

Misuse of social business: When a person involves in social business he or she can do the betterment of the society as well as he can perform the profit maximization. So there is a great possibility of misuse of the social business as a promotional tool for product market or experiment achieving tool for their profit maximizing business. On the other hand, as investors have no individual interest, there might arise callousness on the part of entrepreneurs.

Special Quality and Special Risk: As the social business is run for social welfare and no individual interest, it is questionable quality of the products. Sometimes the entrepreneurs have to take highly risky decisions. But the question is whether any such highly skilled person will be interested to take the risk without any individual profit.

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Poverty Situation in Bangladesh and the Scope of Social Business
According to the Household Income and Expenditure Survey (HIES) of Bangladesh Bureau of
Statistics (BBS), the national poverty headcount rate in Bangladesh has declined gradually but still it was 31.5 percent. The survey also reports that 17.6% (approximately 25 million) people of the country were living in extreme poverty.
Poverty is one of the biggest problems in our country. So an effective and realistic efforts must be taken to reduce obstacles on the way to acquire the goal of halving poverty by 2015, which is the highest priority among the Millennium Development Goals (MDGs). Social business can be considered an important tool in this regard. Bangladesh government in a report entitled “A
Situation Analysis Report on Poverty and Hunger (MDG 1) Bangladesh - A Baseline for Needs
Assessment and Costing” identifies the following four challenges in reducing poverty: reducing hunger and malnutrition, youth employment, promoting pro-poor growth and expansion of urban employment. In fact, these challenges can be alleviated to large extent through social business. We have mentioned earlier that several social business companies are already in operation in this country and they are apparently on a trajectory of success. The father of microcredit and social business Dr. Yunus was born in our country. So I think that the opportunities for social business in our country is promising.

Conclusion
The position of social business is still in its rising stage. Since it is new and incomparable issue, it takes more time to reach mature structure in both conceptual and operational stage. It is urgent to alleviate poverty from our country as well as from the world because poverty is the main culprit for committing most of the crimes. It can be said that winning the war against poverty in
Bangladesh requires innovative efforts like promoting the idea of social business model and proper implementation of them. Bangladeshi people don’t realize the importance of social business fully although Dr. Muhammad Yunus’s business model are now used in many countries of the world.
Dr. Yunus said about this, “It’s not surprising, because people in Bangladesh basically think knowledge always came from the west. They don’t pay attention to somebody who is doing crazy things next door".

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References
1. Akteruzzaman, Md. (undated). “A Situation Analysis Report on Poverty and Hunger
(MDG 1) Bangladesh - A Baseline for Needs Assessment and Costing”. General
Economics Division, Planning Commission, Government of the People’s Republic of
Bangladesh & UNDP Bangladesh.
2. Bangladesh Bureau of Statistics, (2010). “Household Income and Expenditure Survey
(HIES)”, the Government of Bangladesh, Dhaka.
3. Bylund, Per L. and Mario Mondelli, (2009). “Book Review: Creating a World without
Poverty: Social Business and Future Capitalism”, The Electronic Journal of Sustainable
Development. Available at: http://www.ejsd.org/docs/review_of_creating_a_world_without_poverty.pdf.[ Accessed on August 24, 2015]
4. Yunus, Muhammad, Moingeon, Bertrand and Lehmann-Ortega Laurence, (2009).
“Building Social Business Models: Lessons from the Grameen Experience”. Working
Paper 913, HEC, Paris.
5. Yunus, Muhammad and Karl Weber, (2007). “Creating a World without Poverty: Social
Business and Future Capitalism”. Public Affairs, New York.
6. Yunus, Muhammad and Alan Jolis, (2007a). “Banker to the Poor: Micro-lending and the
Battle against World Poverty”. Public Affairs, New York.
7. Younus Center website available at http://www.muhammadyunus.org/. [Accessed on
August 25, 2015]
8. World Hunger website available at http://www.worldhunger.org/ articles/ Learn/ world%20hunger%20facts%202002.html. [Accessed on August 25, 2015 ]
9. Wimmer, N. 2012. “Green Energy for a Billion Poor: How Grameen Shakti Created a
Winning Model for Social Business”. MCRE Verlag UG. Available at: http://www.amazon.com/Green-Energy-Billion-Poor-Business/dp/3943310000 [Accessed on August 25, 2015]
10. United Nations Development Program (UNDP) website available at: http://www.undp.org/content/undp/en/home/mdgoverview.html [Accessed on August 24,
2015]
11. Sattar, Z. 2012. “Social business: Turning Capitalism on its Head”. Available at: http://www.thedailystar.net/forum/2012/January/social.htm [Accessed on August 24,
2012]

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