Development Economics

The Changing Microfinance Industry in India

When most people think of microfinance (which most people do not), they envision a poor person in a faraway country borrowing a few bucks to buy a goat.  In an article titled "Microlender Forecloses on Goat," The Onion proves once again that it has its finger on the pulse:

Representatives from One World Finance, a U.S.-based microcredit provider, confirmed Monday that they had initiated foreclosure proceedings on a goat in southern India following a borrower's repeated failure to make her $2.20 monthly loan payments. "I tried to work with Ms. [Subha] Thangam on this, but once she fell a full $6.10 behind, I had to repossess the goat," said loan officer Michael Conrad, who stated that he was just doing his job and that it was "not [his] fault" if certain subsistence farmers were living beyond their means. "I'd love to recoup the entire $22 loan at auction, but given the glut of foreclosed and abandoned goats in the area, I'd be lucky to get even half that." Conrad also acknowledged that the owner had left the goat in "pretty bad shape" and had even stripped it of its hair for potential resale on the paintbrush market.
The article uses microfinance as an allegory for the housing and foreclosure crisis in the United States.  But, in parts of the world right now, microfinance is starting to look more and more like the recklessly over-extended financial sector prior to the economic meltdown in 2008.  In India, in particular, analysts are concerned that the glut of investment in the microfinance sector over the last several years could be feeding a bubble similar to that of the subprime mortgage in the U.S. When I was in the Philippines, I attended a few microfinance conferences and had the chance to speak with representatives from a few microfinance investment funds from India and elsewhere.  In the eyes of investors, the Philippines could be the next big thing.  The microfinance market in India is overheated, they'd say, with a slate of recent IPOs and a huge amount of private capital flowing into the industry.  Collectively, the portfolio size of all the microfinance institutions in India grew from $252 million to over $2.5 billion in less than two years.  There are tens of thousands of organizations offering microfinance services, but fewer than a hundred have the scale to tap into the capital markets.  A dearth of good investments and an increase in the number of funders has probably driven up the price for good MFIs and simultaneously forced investors to look down-market at institutions they might not have considered in the past. (more…)

Development Economics

Microfinance on Wall Street: The Debate Rages On

[caption id="" align="alignright" width="299" caption="SKS CEO Vikram Akula disbursing money to a client at a center meeting"][/caption] 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: (more…)