The Catholic Church is one of the richest and oldest institutions on the planet. They’ve been going strong for 2000+ years and are extremely sound financially. And yet, the funding for the Catholic Church is mostly voluntary contributions by the faithful. The church’s compact is that if you’re distraught, lost, need spiritual guidance, seeking faith etc., the church will happily help you out with an open sharing of the beliefs of the church and help you get your bearings. And they’ll continue to serve your spiritual and religious needs throughout your lifetime. They do the same in a comfortable environment with free access to knowledgeable and dedicated priests. And they do it with no firm obligation for one to pay anything for all the services rendered.

The church recommends that folks give 10% of their earnings back to the church on a volunteer basis. Most Catholics do not give 10% (or even 5%). Yet, the “business model” for the church works extremely well. The Catholic Church is perhaps the wealthiest institution on the planet today – all of it based on voluntary contributions by the faithful.

In both cases (Yunus and the Catholic Church), the following holds true:

The difference is that with Microlending there is a “tight payback contract” while with the church the contract is much looser with no signed documents etc. Neither has any collateral or much recourse if the beneficiary of aid elects not to pay. Both, however, work extremely well.

I believe that this model can be applied in many more contexts and change the face of philanthrophy and give back. Harina & I intend to apply it to the Dakshana Foundation’s endeavors.

I still have a “day job.” I run Pabrai Investment Funds (www.pabraifunds.com) out of Irvine California. As an investor, return on invested capital (ROI) is of fundamental importance. And I think it ought to be equally important when one embarks on giveback. Resources are always limited and one needs to maximize the returns one generates from them. To this end, in general, education of India’s rural impoverished but gifted children has an ROI that is off the charts. A few months ago, I came across the following article in BusinessWeek magazine. It significantly impacted my thinking:

http://www.businessweek.com/magazine/content/06_34/b3998416.htm

The ROI of the Ramanujan School of Mathematics is simply off the charts. If you take a kid who might not even go to college and instead get him accepted to attend India’s elite IITs, his value to society rises exponentially. During the months that Ramanujan tutors him or her, they likely spend under $1000 on this student. The income enhancement over that individual’s lifetime is likely several million dollars. Investing $1000 and getting a payback of several million over 50+ years is a very compelling proposition.

So, I thought, why not scale the Ramanujan Model?

Harina & I setup the Dakshana Foundation (in the US) and the Dakshana India Educational Trust (in India) in 2006. We would like to eventually recycle virtually our entire estate back to society, and help thousands of gifted kids from impoverished rural backgrounds get into IIT and other exceptional universities around the globe every year.

And the deal with the kids is that they would have a moral obligation (but no legal obligation) to give back 10% of lifetime earnings to the Dakshana Foundation. The foundation, in turn, would use these funds to award more scholarships every year and continue to scale and grow. Thus, after the pump is primed for 10-20 years, it scales without ever going outside of the beneficiary base for funding etc. The model works even with extremely high “default rates”. Just like the Catholic Church. This 10% of income gets reduced to 5-7% due to the favorable treatment of charitable giving by the tax laws in various countries. So the reduction in the donor’s disposable income is minor.

Like any startup, I’m sure we’ll face our own share of disappointments and make a ton of mistakes. We hope to keep learning and continuously improve the model. I’m also pretty sure that the model will evolve over time.

We recently published our Dakshana: 2007 Annual Report. I’d suggest that reading it will get you quite familiar with Dakshana. Thank you for visiting the website.

Warm regards,

Mohnish Pabrai
Founder