Making Money Off the Poor? Microfinance Institutions Going Public Creates Controversy
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Microfinance originated in South Asia in the 1970s when pioneers such as Mohammed Yunus of Grameen, introduced the idea that providing small loans to the poor, especially women, can help generate income. In the last thirty years, after many experiments from around the world, the term microfinance now not only includes credit but also savings, insurance and cash transfer services for low income families.
An explosive growth of microfinance institutions (MFIs) has been seen within the last decade, both in India and globally. In fact, following the recent financial crisis, both Grameen Bank and Kiva have started lending in the United States.
The largest MFI in India, SKS made its first public offering on July 28, 2010. Backed by powerful funders like George Soros and Narayan Murthy, this is only the second “pure” MFI in the world to go public. The first one was the Mexican MFI, Compartamos, in 2007.
The Microfinance Gateway is the most comprehensive online resource for the global microfinance community and recently features an article based on eleven interviews with diverse experts on what they think the IPO could mean for the poor. Here’s a sneak-peek:
For Vikram Akula, the founder of SKS and now a certified millionaire, McDonald’s style growth is the fastest and most effective way to alleviate poverty for most people. In his view this is the only way to reach more people in India (where the annual demand for micro-credit is estimated to be at least US$50 billion dollars) and MFIs cannot depend on donor subsidies to generate such funds.
On the other hand, Mohammed Yunus told AP that commercialization wasn’t “just mission drift” but that it’s “endangering the whole mission”. Yunus believes that allowing MFIs to take deposits, which the Indian law doesn’t permit, can generate enough capital for loans.
Samit Ghosh, CEO of Ujjivan Financial Services based in Bangalore, says “if it (the IPO) is perverted to achieve highly inflated valuations and to increase the personal wealth of promoters and top management through unprofessional and dubious means, then the label of ‘making money off the poor’ becomes credible.”
Critics point out that a publicly traded company’s priority is to generate profits for its shareholders. This may lead to lending standards being lowered, and that high valuations might force MFIs to compromise on the double bottom line.
Advocates argue that reaching scale will reduce costs and, over the long term, help lower interests and encourage development of flexible products.
Camilla Nestor, Vice President of Grameen Foundation, says that IPOs and other financial tools can provide much needed capital, but MFIs also need to adopt performance metrics like the Progress out of Poverty Index (PPI) that can analyze social indicators: “Benefit to the poor has to be our first priority,” she says. Nestor points out other sources of private capital, besides an IPO, which can be tapped by MFIs.
Skeptics like Vijay Kumar question whether a plain-vanilla MFI model can solve the multi-faceted problems of the poor. Kumar is the Director of the National Rural Livelihoods Mission at the Ministry of Rural Development of India, who believes that the key is to help create viable enterprises of the poor—something that’s countered by the high-cost financing offered by MFIs. “People require not just microfinance but also knowledge, collective institutions and their enterprises being linked to the market in a sustainable way; there has to be a holistic value-chain approach.”
He points out that India has a wide presence of commercial and national banks and that after building the capacity of self help groups, they can be linked to banks where they can borrow at 10% per annum.
MFIs usually charge around 30% interest while money lenders can charge up to 100% per annum.
As of March 2010, SKS had almost 7 million borrowers across 90,000 villages of India. Some experts like Justin Oliver, who heads IFMR’s Center for Microfinance Research in Chennai say that the poor are better off with financial services offered by MFIs like SKS than without any at all.
SKS’ success at the market (it has received bids for 13.5 times the stock available), has helped it acquire a status that large and smaller MFIs are aspiring to. It is widely projected that the next MFI to follow suit will be Spandana.
As of March 2009, SKS had assets of US$ 596 million and it hopes to raise an additional $350 million through the initial public offering, which are big numbers for an organization that started out as a small non-profit only 12 years ago.
A clear signal has been sent to big investors that lending to basket weavers, small farmers, and vegetable vendors can be profitable but it is still not clear how this IPO will help the borrowers. The jury is still out.
Read the full article or listen to an audiocast of the interviews.
Additional links and reading:
The Microfinance Gateway
Consultative Group to Assist the Poor (CGAP)
From the CGAP Blog: SKS Success and Excess
The New York Times on Microfinance
My colleague David Roodman http://blogs.cgdev.org/open_book/ is on vacation. I"m eager to know what he thinks of this on his return.
Thank you Lawrence. I am a regular reader of David's blog and look forward to his views when he returns.
Interesting article, but not so much because of what it says, but because of what it chooses not to say. The article scrupulously avoids making any reference to the growing over-supply of microfinance (the 'bubble') phenomenon in India, a problem especially acute in Andhra Pradesh (the home state of SKS and of the other main MFIs). This is strange, if not a little dishonest, given that the overwhelming global justification for the IPO process is that it will greatly increase the supply of microfinance, which will be good for the poor. Will it, really?
In my own short blog on this subject I've tried to be a little more open on this issue and other issues, like private enrichment. Go to -
Bindu Ananth of the IFMR Trust and I have contributed our perspective on the SKS IPO on Ajay Shah's Blog -- some of you may find that of interest: http://ajayshahblog.blogspot.com/2010/08/don-like-sks-valuation-compete…
I work in the sector and my work in Bangladesh & ongoing work in Pakistan suggests that the industry is ripe with problems, the poor would remain poor while these micro-finance lenders will be able to float shares in the stock market. If the dividends are shared with the borrowers, they might graduate out of poverty since this is not going to happen, even when the borrowers are allowed to buy shares, as their shares are locked up forever. The claims that managing micro loans results in higher interest rates is problematic since the field workers are poorly paid workers. If the world is serious in eradicating poverty, it needs to create sustainable employment opportunities and sustainable livelihood.
There have been complaints about Vikram Akula becoming a millionaire after the IPO - people say it's just wrong to profit off the poor. Since everything he did was legal, the attacks are on moral grounds and one begins to wonder how morality crept into business this way. Sure, microfinance is a social business and some may say more heart is needed in this type of business - but when we questions business on the basis of morals (let's set aside CSR for the moment), where does it end?
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