Monday, September 13, 2010

Can microfinance be both moral and profitable?

I have recently stumbled upon a CNNMoney article on microfinance that talks about SKS Microfinance Ltd., India's biggest microlender', debut on Bombay Stock Exchange.

At first, I saw no problem with SKS' Initial Public Offering (IPO). By going public SKS will attract more money to its business that means more loans for India's poor. Yet, I forgot that as a public company SKS now will be accountable to its shareholders, who are interested in profit-maximization, not in serving the poor. How does a microfinance organization boosts its profits? You got it - by increasing interest rates on its loans. Now, this, of course, has been the main criticism of the founder of microfinance, Muhammad Yunus. He affirms that any microcredit organization charging its clients more than 15% interest rate does not truly serve the poor, rather it is in a profit-maximizing business.

So, is there a way for MFIs to get investment without raising their interest rates? The answer, yet again, lays in creative and unconventional thinking of Muhammad Yunus. The answer is social business, a business that functions in every way as a regular profit-maximizing enterprise except that it is not. Instead of profit maximization a social business' only goal is to serve a cause. Thus, a social business uses all its profits solely for the expansion of its operations. Moreover, a social business can be social in a different way, having poor people as its shareholders. In the beginning though social business has to be supported by regular investors, who will put their capital into a social business as into any other one, the only difference being that they will not receive any dividends. As soon as a social business becomes self-sustainable, investors will get their money back and will be able to decide to reinvest the sum or spend it on something else. The motivation behind investing in social businesses is simple: the desire to do good, which is in human nature and which brings if not material then emotional and spiritual benefits.

Therefore, only if SKS was operating as a social business and if its shareholders had altruistic and idealistic minds, then SKS could have continued to truly serve the poor at the same time getting enough investments to run its business and expand its operations. Yet, in the business of serving the poor there is no place for self-enrichment. That again proves Muhammad Yunus' position, arguing that any hybrid business model will ultimately sacrifice its altruistic values for profit maximization.

And yes, did I mention that Vikram Akula, the founder of CEO of SKS, has recently sold his shares of the company for $10 million? He says he is not ashamed of it, stating that rewarding microfinance employees is part of his business strategy. That's a nice reward, isn't it? Especially that much of SKS' original capital came from public donations and grants.

Now, where do you stand on this issues? Do you sympathize with Mr. Akula's strategy or admire Mr. Yunus' altruistic position? If you haven't made up your mind yet, you will probably be able to do so after watching Muhammad Yunus' and Vikram Akula's debate on September 21st at the Clinton Global Initiative.


  1. I stand with Yunus in that the model of microfinance that Grameen practises is a moral collateral form, the kind that serves poor people best.

    On the subject of making a profit, here is the case for a social purpose form of business. The key point here is that it's not whether one makes a profit, but what is done with that profit that counts.

    The author goes on to source a project in Russia using his own funds. The community bank was based on the Grameen model and 5 years later describes the success. At this point I've joined him to create this social purpose business model in the UK.

    More recently in an article for Axiom he gives our views on the protection of social emphasis.

    Microfinance can be costly when it depends on expertise from wealthier countries. Grameen's loan circle approach has its overheads but isn't intended to profit from the poor.

    From the introductory project in Russia one of the impacts was the creation of the Russian Microfinance Centre which engages local staff and the moral collateral approach.

    Otherwise what is described as micro finance is available only to existing business and that's still the case in most of Eastern Europe. Some od these schemes not only profit from the poor but also indicate that they're being used in money laundering activity.

  2. Wow, I am so glad to hear that there is at least one truly propoor microfinance program working in Russia!!! And I do know how widespread corruption is in Russia and how easily profit-maximizing businesses can disguise themselves as social businesses or nonprofits.

    I am wondering how hard is it to operate these types of enterprises in Russian and ex Soviet Union countries? Because I know that nonprofit sector, at least in Russia, is very weak and virtually non-existent if you compare it with the American one.

  3. Apparently, not many people in microfinance industry are alarmed by the capitalization of microfinance organizations. Here's the article from Huffington Post:

    Some MFIS apparently successfully combine profit-maximization with their social mission. Yet, at the same time, a lot of MFIs now charge more than 15% that Yunus thinks should be the maximum interest rate on microloans for the poor. So, the success of their social mission remains in question.

    Now, I, personally, wouldn't be against profit-maximization and IPO by microfinance organization, if they kept their interest rates below 15%. However, I do not see how making $10 million off an organization that was started with public donations could fit in any of the scenarios that I can accept. And I ma very surprised that nobody is talking about that.

  4. Yes, it's pretty difficult and my colleague who sourced that project was prevented from returning by being marked as a threat to national security on account of refusing to pay bribes. The follow on project in Crimea was undermined and he responded by blocking his own project until US gov was ready to take a harder line on corruption in more recent times.

    The protection of donated funds has been something that's concerned us here in the UK for some time. Though we had a company form without share capital, known as a guarantee company, it was consider relatively easy to convert to a share company and distribute fund. This is where the Community Interest Company model comes in around 2005, in that it has what's known as an asset lock to prevent such things being done.

    I've included this in the category of Social Business and For Benefit corporations along with Yunus' social business, B-Corps and L3C models on this network should you be interested in general developments.

  5. Thank you for the comments again, Jeff! Will check the link, because I am very interested in social business!