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A recent Forbes publication, "Microfinance Fights Growing Pains," examined the rapid growth and associated challenges of the microfinance field.

As noted in the article (and thanks to Vital Wave Consulting for highlighting this), the explosion of new entrants and the overall rapid growth of microfinance may be creating an environment ripe for inefficiency or fraud. For example, with little communication between lending agencies, some loan recipients have borrowed multiple times against the same collateral. The Forbes article called for credit bureaus to be established so that lenders can communicate (formally and informally) with each other in order to avoid double or triple lending to dishonest borrowers.

Credit evaluating mechanisms exist throughout the developed world - credit bureaus for loans, better business bureaus for businesses, and even seller ratings for those trading on eBay. These institutions create trust, critical to a well functioning economy, and where the rules and behaviors of doing business are either not codified or not enforced, the economic impact can be severe. In fact, the worst case scenario - which was in full force during a recent work-related trip to Aceh, Indonesia - can bring business to a crawl.

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The NextBillion.net team is proud to introduce our newest member: Staff Writer David Lehr.

David has over fifteen years of experience in international business and development focused primarily on information communication technologies and job creation and is currently Senior Advisor, Social Innovations at Mercy Corps. He has consulted for several non-profits, including Acumen Fund and Gates Foundation on issues related to technology and poverty alleviation.

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Guest blogger Arun Sharma is Scouting Lead for Innovations at the Lemelson Recognition and Mentoring Program (L-RAMP). He is also a writer for L-RAMP Blog, which explores trends in social enterprise, innovation, technology and poverty alleviation.

By Arun Sharma

Meet Dr. Venkata Krishnan, a retired veterinary medicine professor from Chennai who has developed numerous products for animal health and welfare. Recently, he came to us with an innovation for dairy cows: a way to detect bovine mastitis much before clinical symptoms of the disease significantly affect milk production.

Bovine mastitis is a bacterial disease which commonly affects dairy cows and through degraded and reduced milk production, has negative financial impacts on dairy farmers. By developing a simple and inexpensive kit for the early detection and treatment of bovine mastitis, Dr. Krishnan has provided an easy way for farmers to preserve the health of their cows and minimize financial losses from this disease.

After completing development of the kit, Dr. Krishnan wanted help to take this kit into the market. Enter L-RAMP, a non-profit socially motivated incubator, which was well placed to offer him the funding, technical assistance and business development support that he required. We recognized the potential social impact of this innovation and, as a result, have been enabling Dr. Krishnan through key barriers including protecting his intellectual property, proving the technical performance of the kit and developing a business model which delivers the benefits to farmers in a sustainable manner.

Today, his patent application is in progress, technical reports indicate good detection and treatment performance, farmer reviews are positive and we are working with him to develop a business model to reach India's thousands of small and marginal dairy farmers. We hope to bring Dr. Venkata Krishnan's innovative mastitis detection and treatment onto the market soon and thereafter scale it up to dairy farmers across India. Watch this space for updates.

This is the market-based approach to poverty alleviation that we advocate at L-RAMP. Through the provision of capital funding, technical mentoring and business development support, we aim to scale innovations like Dr. Krishnan's into enterprises which can achieve large-scale social impact. We see a virtuous cycle of benefits in this approach - enabling innovation to become social enterprise leads to community benefit, promoting increased prosperity for all which enhances the potential of people to continually innovate. Our strategy is based on three key convictions:

• We believe that an important component of effective poverty alleviation strategies should be a focus on innovative ideas
• We believe that local knowledge spawns the most useful innovations
• We believe that enterprise is the best way to achieve maximal social benefit

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This weekend I had the chance to read CGAP’s new report about branchless banking. The report is a short summary about the current state of the branchless banking market. To those readers who do not know anything of the market it is an easy introduction. To those readers who have been following the sector in recent months, it offers a good peek into the future of what branchless banking may become and what it needs to get done.

The paper lists off seven key observations about the current state of the market, in addition to four uncertainties about how the market will develop and four predictions. In my opinion, most of the seven observations are already well-known. Still, these known knowns are nicely and succinctly explained. Many of these observations were brought up during my interview (see part 1 and part 2) with CGAP’s Mark Pickens.

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Stephen J. Gould once called humans "the primates who tell stories." Stories are part of how we transfer culture, they are a device through which we shape our identity and relationship to the world - in the development community, they are a way to get people to act. Stories help connect people emotionally to a cause far better than any mere statistic could, no matter how compelling.

Tell me that there are millions of micro-entrepreneurs without access to credit, and I might not bat an eye - tell me a good story about even one person who was able to lift themselves out of poverty through microfinance, and you've made a personal connection.

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Base of the Pyramid (BoP) strategy has a few key tenets, one of which is the power of aggregated demand. Those living at the base of the economic pyramid may have little buying power on their own, but when they are pooled together, their consolidated demand amounts to a viable market.

Companies are increasingly aware of and planning around this aggregated demand approach, as we have seen through such examples as the William J. Clinton Foundation's ability to bring down the prices of AIDS drugs through a guaranteed high volume of sales.

That said, there is a need for not only existing products and services, but even more so for innovation at the BoP – so what about aggregating demand in those cases? How do you assess the ability and willingness of the poor to pay for products and services that do not already exist, and how do you convince companies to take a risk on such a vast and fragmented market?

I asked myself this question while researching the myriad of innovative water filtration systems designed for the BoP. As I was getting ready to critique a few of the designs and business models, I realized that I wasn’t qualified to make those judgments. I have only had to use a water filtration system a handful of times, and I don’t know the numerous local realities well enough to criticize one design over another. However, the targeted population for these systems is geographically scattered, linguistically diverse, and resource-intensive to reach, so who would decide which innovations would move forward?

While many in the base of the pyramid movement have hoped that innovations to serve both developing and developed markets will come from BoP communities themselves, co-creation has been lengthy, intricate, complex and time-consuming. Hart and Simanis have invested countless hours in the field practicing their embedded innovation model, and although they have had numerous success stories, the businesses that have been created through this model are still primarily community-centric versus globally-reaching. As Al Hammond’s recent writings on transformative sector scaling have pointed out, "A number of community-initiated business models have produced good results, but they aren't easily replicable and don't scale." Going from community to community and engaging each in participatory design may be the ideal for embedded innovation, but it is certainly not at the scale that is necessary to reach efficiency gains and profitability through aggregated demand.

So, how do we engage with and understand the needs of millions of geographically dispersed people? Part of the solution may come from the model of internet-based networks that consolidate demand – which I was first introduced to through Pop!Tech’s curator Andrew Zolli.

Zolli spoke recently at Columbia Business School about forces shaping our society. One of the key determinants that he laid out was the power of networks. Zolli, who is known as an expert in global foresight and innovation, said that understanding networks will be an increasingly invaluable skill, and the power that networks yield will also grow in enormity.

He was not just referring to social networks or to personal networks, but also to technology-based demand networks. These are online communities that have been created to aggregate the demand of multiple users in order to attract events, boycott businesses, and even design new gadgets. He cited Eventful and CrowdSpirit as two leading examples of these technology-based demand networks. Thanks to the internet, individual actors who would normally not yield much power on their own are able to connect virtually with people with similar demands and make something happen.

CrowdSpirit, though very much a start-up, is the type of platform that I feel could help bridge the divide between innovation and high-volume demand at the BoP. It was launched to "co-create" electronic gadgets through an online design community. In essence, innovators from anywhere can submit ideas to the site, and numerous people vote for their favorite designs and aspects and then agree to purchase the device if the producer adopts their preferences.

The inventor decides to go forward with the idea if he or she sees that there is sufficient demand. CrowdSpirit is built on community-based and participative design, and takes some risk out of the equation for the producer/inventor, since there’s an advance purchase commitment at the end of the R&D pipeline.

Although it is built for high-end electronics, the model is fascinating. The internet is enabling people to overcome traditional boundaries and bringing together the voices of millions. In 1983 Pierre Bourdieu, an early economic sociologist, realized the power that could be created through networks of relationships, "enabling numerous, varied, scattered agents to act as one and overcome the limitations of space and time."

That sounds like exactly the type of model that would work for the BoP, and with technology that Bourdieu could not imagine only two decades ago, it may be possible. In C.K. Prahalad’s latest book The New Age of Innovation, the author notes that "we have finally reached the point where the confluence of connectivity, digitization, and the convergence of industry and technology boundaries are creating a new dynamic between consumers and the firm." He continues by observing that

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This post is the last in a five part series on a radical new approach to scaling BoP business models, what we call a transformative sector strategy. In this segment, I address the six preceding guest posts that commented on this strategy and offer some concluding thoughts.

I welcome these thoughtful comments on the transformative sector model I am proposing to scale service delivery to the BoP. Sagar Gubbi thoughtfully extends the sector-based scaling model. His examples illustrate the richness of potential solutions that are springing up and that can be learned from and replicated across a sector. I think he is correct that any transformative model will need adaptation to local conditions and policies. But mostly his examples encourage me in pushing ahead to implement the approaches I have outlined. The comment by Paul Rigterink on the potential of using a pharmacy platform to also distribute veterinary medicine and thus improve livestock supplies underscores the synergies that a sector approach can generate.

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I received an e-mail today from the Stanford Social Innovation Review, one of my favorite journals in the 'third sector' space. The e-mail was to inform subscribers that SSIR has added 5 new writers to its influential Opinion Blog - including NextBillion.net's very own Grace Augustine!

Congratulations, Grace. You will be in good company at SSIR's Opinion Blog, including Benetech founder and MacArthur Genius Jim Fruchterman, Philanthropy 2173's Lucy Bernholz and SSIR founder Perla Ni.

Here's the full e-mail I received today (since SSIR has not blogged this news, ironically):

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SSIR, always eager to enrich the conversation, is thrilled to announce that the following bloggers have signed on with us.

Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world's poorest citizens.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Peter Deitz is a micro-philanthropy consultant and the founder of Social Actions, a website that helps individuals and organizations use social media to plan, implement, and support peer-to-peer social change campaigns so that grassroots solutions to local and global problems can flourish. He also writes a blog about micro-philanthropy.

Jim Fruchterman is president, CEO, and founder of Benetech, a nonprofit technology company that explores the social entrepreneurship side of technology applications. He was awarded a 2006 MacArthur Fellowship from the John D. and Catherine T. MacArthur Foundation and named an outstanding social entrepreneur in 2003 by the Schwab Foundation.

Mario Morino is co-founder and chairman of Venture Philanthropy Partners and chairman of the Morino Institute. His career spans more than 40 years as entrepreneur, technologist, and civic and business leader. He also has a long history of civic engagement and philanthropy in the National Capital Region.

Guest blogger Francisco Mejía is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations.

Autor's note: The views expressed in this blog contribution do not necessarily reflect those of the IADB.

In this post, Mejía responds to Allen Hammond's series on taking Base of the Pyramid models to scale. This week, NextBillion.net will publish responses from a number of BoP experts and practitioners, followed by a concluding post from Hammond.

By Francisco Mejía

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Guest blogger John Paul is a Co-Founder and former Managing Editor of Nextbillion.net. He is currently finishing up his MBA at Cornell University, where he has focused on private-sector solutions to global poverty with the school's Center for Sustainable Global Enterprise

In this post, Paul responds to Allen Hammond's series on taking Base of the Pyramid models to scale. This week, NextBillion.net will publish responses from a number of BoP experts and practitioners, followed by a concluding post from Hammond.

By John Paul

The implementation of transformational sector strategies is a compelling idea, and has a number of comparative advantages over the traditional business-only approach. First, focusing on sectors takes a systems view of the problem, allowing for the identification and mitigation of bottlenecks and missing pieces that might have prevented other initiatives from scaling. Second, what is being created is a platform network that can be adapted as needed, as the examples cited of adding IT infrastructure or remote diagnostic equipment to an established distributed healthcare network demonstrate. This ensures the increasing utility, rather than inevitable obsolescence, of what is put in place. Most intriguingly, in some ways what are being developed are human capital networks, in many ways akin to online social networks.

These platforms provide tangible inroads to large populations that many large corporations may otherwise be unable or unwilling to try and serve. The Next 4 Billion report did an excellent job of identifying the potential market. This approach provides one possible roadmap on how to reach it. Viewed in this light, transformational sector strategies enhance, rather than replace, existing efforts to reach BoP markets.

There are two primary areas, though, that I think are worth further examination. First is, how do you make the most of what already exists? Although providing IT services is a greenfield opportunity, other basic services such as healthcare, housing, and energy are already often being met by local entrepreneurs, albeit in an arguably limited or inefficient way. Even so, the current provision does support local livelihoods, and any new transformative sector approach should do its best to integrate them into the new value chain. ITC's eChoupal Initiative adopted this strategy when it hired the local agricultural middleman to manage the produce procurement operations that made their positions obsolete.

While working with existing SMEs is a good idea, understanding the informal economy will also be critical. By relying on and building the capacity of local talent already in place, such a strategy can help proactively address two of the biggest challenges a scaling BoP business faces: managing human capital and integrating the business with existing local relationships.

Second is the approach taken to "understand deeply the critical problems and opportunities of individual BoP sectors". These sector-specific problems and opportunities will differ between countries and within them, as will the implementation challenges that the business model faces. While I agree that there will be a certain amount of ‘DNA' that will be transferable, there will be a trade-off between creating a model that is highly scalable and one that is simultaneously adaptable. Finding this "sweet spot" will take time. WaterHealth's model, for example, was iterated several times before they came up with the business plan they are now scaling internationally.

In my mind, the process of identifying transformational sector strategies is less about starting with a complete business plan, and more about doing business model R&D. The latter takes longer, requires more patient capital, and involves the participation of a host of local partners, but the end result will be a more robust, scalable, and culturally appropriate business model.

One such approach is the Base of the Pyramid Protocol, developed by Erik Simanis and Stu Hart at Cornell University. Designed for use by an established company, the Protocol uses development approaches, such as participatory rural appraisal and asset-based community development, to co-create business solutions with the local communities the company intends to serve. It has already been successfully implemented in India and Kenya, and soon will be used in both Mexico and Flint, Michigan.

Identifying and working with the potential ‘winners' among the existing initiatives already in place is another strategy. But here again, it will take time and a local presence to understand the problems and promise associated with each model, as well as the limits to localization, and then develop the transformational sector model that mitigates the key challenges they face. As Al says, this will be hard, but not impossible. And certainly worth the investment.

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