(Photo: Bloomberg)
(Photo: Bloomberg)

Opinion | A community-based approach to business success and growth

A self-managed network of trust can deploy capital and generate wealth for the common good

If there is one thing the 2008 global financial crisis tells us, it is that the world of banking and finance cannot be run purely on the basis of rules and regulations. No matter how good your regulatory laws, human beings will find a way to get around them. In any event, rules also insulate individuals from assuming responsibility for something beyond their own self-interest. Thus, smart bankers developed financial products without understanding the risks involved, their salespeople sold inappropriate products to people just to earn commissions, and customers bought what was in fashion or pushed vigorously. In a world of limited liability for individuals, risks actually increase as no one is responsible for the entire system as long as he is following rules.

While there is no wishing away the modern world of rules, regulations and state intervention, there is an older way of doing business that is not being given its due: community-based banking and financing. Community-based businesses, where lenders and borrowers, investors and investees tend to be people with similar identity markers, tend to have fewer defaults and collapses of the magnitude of the global financial crisis. Reason: The funding commitments are not based just on rules, but also on ties of kinship and trust. Self-help groups also work for the same reason. Each member of the group knows other members fairly well, there is a reluctance to let the group down, and when someone faces trouble, the group pitches in with help. Defaults are few, and if they happen, tend to be genuine.

In his book, The Third Pillar, former Reserve Bank of India governor Raghuram Rajan notes that capitalism is in trouble because two of its pillars have grown too strong (state and markets), while the third pillar, the community, has weakened. This is less true for India, where community has been strong, but state and markets have been weaker and subject to private capture.

Unfortunately, in our aping of Western institutions, we have not leveraged the one strength we do have: community. If one were to look back at some of the biggest business houses today—the Tatas, Birlas, Goenkas, Singhanias, Chettiars, etc.—their initial rise to prominence did not depend only on formal financing. They depended on informal mutual support within their own communities. The Birlas, for example, have invested not only in closely linked family businesses, but also those of loyal employees who were helped to start ancillary businesses and create wealth themselves.

Before the National Stock Exchange became India’s No. 1 bourse, the Bombay Stock Exchange was run by community-based brokers who ran it like a private club, but one thing about them stands out. Whenever one of their own got into trouble, either by over-trading or by making a huge speculative mistake, the community would close ranks to bail him out. No broker would allow a fellow community broker to face ruin. The community served as a safety net and policing force.

The point is that businesses today have to stand on two legs. One is formal finance from banks, private equity, venture capital or angel funds, the other is community finance and support. The latter is often very important since community lending can often come without collateral, and the business—whether of lending or investing—is marked by trust on both sides. Often, community-based investing comes with an added benefit: a mentor for those borrowing or seeking investment. While this form of investing and lending cannot substitute for the kind of money banks or private equity investors can offer for scaling up, they can form the bedrock of angel and startup funding.

Over the last seven years, one such effort to promote community-based businesses that go beyond traditional caste groups has been spearheaded by the World Hindu Economic Forum (Whef), which wants to promote the community’s prosperity by bringing successful businessmen, traders, professionals and economists on one platform for economic uplift.

The Whef, which started in Hong Kong in 2012, is holding its next annual meeting in Mumbai during 27-29 September. It believes that charity alone will not help end poverty. Rather, prosperity for all depends on creating sustainable businesses, for which a community-based approach works best. Whef’s mission is to create and share surplus wealth, and is anchored in the Chanakyan sutra “Dharmasya Moolam Arthaha", which says that all dharma is rooted in wealth (or good economics). Dharma, in this context, is not religion, but upholding what is right for society as a whole.

In India’s ancient past, the link between dharma, temples and commerce was strong, and many Chola expeditions to South-East Asia were funded in part by the wealth of temples or temple donors. In modern-day India, over 100,000 temples in the South have been taken over by the state, and temple wealth is essentially appropriated for non-religious purposes. In this context, a community of trust based on the Hindu identity could be worthwhile for wealth creation and distribution. One can only hope that the Whef succeeds in its mission to promote community-based entrepreneurship and prosperity.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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