Given my post yesterday about the benefits of profitability, a new article in the Wall Street Journal about the IPO of the largest microfinance institution in India is serendipitous. This isn’t that new of a story, though whenever microfinance makes it into the Wall Street Journal or the New York Time, you can guarantee that everyone in this industry will be talking about it. Hopefully I will be one of the first to offer my opinion.
There are a lot of case studies that highlight the “capitalism vs. altruism” schism in the microfinance today. After all, Compartamos in Mexico went public three years ago i topic I discussed at length one of my first posts on this blog – and there are dozens of private equity and venture capital firms focusing on the microfinance segment. But this one is unique in that the two central players – Vikram Akula, the CEO of SKS, and Muhammad Yunus, founder of Grameen Bank and godfather of microfinance – are closely related and, on this debate, stand diametrically opposed. Akula is a former disciple of Yunus, copying the Grameen model in SKS’ initial phases. It is not dissimilar to Aristotle and Plato, or Luke Skywalker and Darth Vader. My opinion on the matter has become a bit more formed over the last few months. I tend to side with Akula and SKS in their decision. First, some background on the path of the organization once Akula left Grameen Foundation to start SKS:
Mr. Akula started on his own with a small team that went from village to village in the southern state of Andhra Pradesh. He used the Grameen model, which sets up groups of poor women and lends them as little as $50 to help with small businesses like growing vegetables or running a tea stand.
He also took cues from McDonald’s Corp. and Starbucks Corp., standardizing training and lending procedures to cut costs and accelerate growth. Employees were paid a decent wage so that Mr. Akula wouldn’t have to rely on volunteers and regional managers from top, rural business schools. And he built in enough profit to make the business appealing to institutional investors.
This is the kind of innovation the world of microfinance needs. In the aid and development sector, I think that there is a dearth of strong business acumen and adherence to practices that have been effective in the corporate and for-profit sectors. Among some people, there is a belief that this approach is inherently destructive to the social mission, since you begin to look at your clients as numbers rather than people. And this business is about helping people, regardless of the numbers. But what SKS and others realize is that the numbers are important, and maximizing efficiency and tapping into the huge amounts of money that the capital markets can offer is the most effective way to serve your core clientele, the poor.
Muhammad Yunus recently said that any MFI charging 15% above the cost of capital needs to cut costs or profits. I dont’t think it quite that simple. No microfinance market – re: country – is the same. They have unique operational challenges, varying levels of competition, and different regulatory environments. To make a arbitrary cap of 15% above cost misses the nuanced challenges faced by MFIs globally. SKS charges interest rates of 18% above cost of capital. But it has a portfolio of US$1 billion and made US$5 billion in loans last year. That is an astronomical number. And the number of people that benefitted from SKS services is a lot higher than it would have been had Vikram Akula chosen a different path for his organization.
Accessing public capital means more money for expansion, more money for new products, more money to pay employees, and the potential for scale that could never exist without it. Akula sums up in a sentence exactly why he chose to take the company public:
“The only place you can get the amount of money that is needed to help the poor is in the capital markets,” Vikram Akula, founder and chairman of SKS, said in an interview. “That’s why we are doing this IPO.”
And, at the end of the day, I think that is it. Or, put another way:
“Professor Yunus’ view is that microfinance should be a social business — no profit no loss. We have a different view. My view is that if you are trying to raise $50 billion in the Indian market, even if you have the charisma that Yunus has, you still can’t raise that kind of capital from social investors. The only way is through commercial capital markets and for that you need to be not just profitable but highly profitable,” says Akula.
I think that he is right. There are limited altruistic dollars in the world with strictly social motives attached. But there are also a lot of people out there who like to invest conservatively in bonds or mutual funds that are willing to accept a modest return and also help the poor. It is not as if the people investing are buying BP, Transocean, Halliburton, and SKS Microfinance (maybe they are). So it is still possible to make a profit and use those capitalist dollars for productive, social causes. SKS is the 7th largest microfinance organization in the world. It will need to be sensitive and self-aware when it comes to mission drift, making sure that the focus on the bottom line doesn’t completely overshadow the social mission. But until we can come up with a better way to make total financial inclusion for the billions of unbanked people in the world a reality, I think this is a healthy direction to move.
It is important to note that, despite the way it is presented in the WSJ and the Times, this is not a binary argument. It is easy to draw a line in the sand and make people choose between Muhammad Yunus and Vikram Akula, who are at least philosophically opposed. In my opinion, there is a role for MFIs with a profit motive and those with a purely social mission. The ladder of poverty has a lot of rungs, and there is a deficiency of financial services at each. Both types of institutions can and do serve a valuable function. After all, SKS and Grameen Bank are both among the top ten largest MFIs in the world. This is a healthy debate to have, since it shines more light on the industry and helps maintain a level of self-awareness about the purpose of microfinance, but it is important to appreciate the nuances of the problems and the solutions.