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From Wall Street to the streets of Bolivia

Is it possible to make a living doing business with street vendors or with budding microentrepreneurs with no capital other than their desire to work?  “Yes it is,” Michael Chu says emphatically.  After two decades as a Wall Street executive, this microfinance pioneer took a chance on the business world himself. He decided that by giving financial services to the poor he could use the market to make a major social impact.

The figures tell the story.  Over 50 percent of the world’s population—about 3 billion people—lives on less than $2 a day.  It is hard to think of any business venture with a greater number of prospective clients.  That being the case, why have commercial banks traditionally ignored this market?

Discover the client

“There has been a lack of information,” was Chu’s response.  “This population is unknown and, even when its existence is acknowledged, people operate under false premises.”  For example, it was thought that poor people didn’t pay their bills.  In truth, they are more responsible with money than people with credit cards.  It was also thought that the poor lacked sufficient knowledge and that they would require hours of training to understand the banking system.  “Anyone who can survive in a triple- or quadruple-digit inflation economy already has what it takes,” Chu pointed out.

Gradually, commercial banks began surmounting these obstacles and others, such as the lack of assets to cover credit, and it has become clear that “one can benefit economically from serving the poor.”  What Chu considered most revolutionary was that the benefit of serving the poor as clients has the same business benefits as serving any other segment of the population:  it attracts competition, creates an industry and, more importantly, brings poor people into the business world.

From charity to business

This approach means that poor people go from being passive recipients of assistance to being active, service-demanding clients.  The case of Bolivia, a country where microfinance and microcredits have flourished, is a good illustration.  “In 1986, banks were completely oblivious to the needs of a ‘chola’ street vendor, and today there are banks competing for her business,” said Chu.

According to Chu, the definition of what constitutes a business is changing.  Until now, businesses were defined by goods and services produced for the wealthiest one-third of the world’s population, or 2 billion people; among these are the consumers of the first world, so to speak, and the elites of the third world.  Today, the microfinance industry is reaching the nearly 4 billion people at the base of the pyramid.  The wealth generated by microfinance businesses could equal or surpass that created by the 2 billion consumers at the top of the pyramid.

Michael Chu was born in China, raised in Uruguay and educated in the United States.  He is managing director of Pegasus Venture Capital, an investment firm that focuses on high-growth companies in Latin America, as well as a senior lecturer at Harvard Business School.  Chu has also served as president of ACCIÓN International, one of the leading networks of microfinance institutions.  He was the guest speaker in September at the Forum on the Americas—an IDB program created in 1995—which features presentations on priority development issues in Latin America and the Caribbean.

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