Woman herding goats in Nagar Village, Tonk District, Rajasthan, India (photo credit: ILRI/Mann).

Vikram Akula, founder and chairperson of the SKS Microfinance, in a blog he wrote for 800CEOread, tells the following charming story of how he ended up meeting with some of the richest people in the world to explain to them how the poor make money.

‘Today SKS Microfinance is the largest microfinance institution (MFI) in India. But it wasn’t so long ago that SKS was just an upstart idea. When SKS finally did gain traction, I found myself in the surreal position of explaining our model to the world’s biggest business and philanthropic leaders who wanted to learn more about harnessing microfinance to alleviate poverty. . . .

‘In 2006, SKS was fortunate enough to get some favorable media attention. Others far away from India took notice too. The Gates Foundation was considering launching a microfinance funding program and Bill and Melinda Gates had set out to learn everything they could about microfinance. Melinda Gates had already come to India to see microfinance at work in villages. Their next step was to invite eight MFI practitioners to a roundtable in Seattle. We met in a conference room in a nondescript (but, as I was later told, bulletproof) building. Bill Gates Sr. would be joining Bill and Melinda, along with another “friend” of theirs. When they walked into the room, we saw that the friend was Warren Buffett.

‘We had a wide-ranging discussion on the basics of microfinance and how it was practiced in various parts of the world. Then Bill suddenly asked, “Hold on. What are people possibly doing where they can pay 28% interest on a loan and still make money?” I took a deep breath and started explaining what I call “goat economics.”

‘I described how a landless agricultural worker might use a 2,000 rupee loan (about $40) to buy a goat. She continues with her daily work and takes the goat along with her to the fields. The goat eats grass and virtually anything else, so there is no investment from her end. A goat gives birth to one or two kids a year and the value of the offspring is about 50% of the mother, or about 1,000 rupees. Even if a borrower took a 28% loan, she makes a return of about 70% on invested capital.

‘An interest rate of 28% might seem high, but demand for SKS loans was exploding. We had almost no defaults among borrowers, and re-payment rates were about 99.4%, higher than re-payment rates in the west. Clearly, the system worked for the poor. . . .

‘As I finished my explanation of “goat economics” I watched Bill Gates scribble on his note pad. A thought popped into my head: “I’m explaining to the richest man in the world how poor people make money on goats.” It was an amazing and affirming moment.’

Vikram Akula, the founder and chair of SKS Microfinance, lives in Hyderabad, India.

Read the whole blog by Vikram Akula at the 800CEOread website: Explaining goat economics, 8 November 2010.