SKS Microfinance, India’s largest microfinance lender, did a $354 million IPO Wednesday. This may encourage others to do likewise. The result would be much more money for very small loans. Sounds good, but it’s meeting objections:
A publicly traded company’s traditional obligation is to make money for its shareholders, while the mission of microfinance — loans typically under $200 for starting businesses that banks won’t make — is to lift people out of poverty. Some say those are irreconcilable objectives.
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“This is pushing microfinance in the loansharking direction,” Muhammad Yunus, who was awarded the Nobel Peace Prize for his work at established microfinance lender Grameen Bank, told The Associated Press. “It’s not mission drift. It’s endangering the whole mission. “By offering an I.P.O., you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me,” he said. “Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people.”
The for-profit and non-profit models would compete for business. The question is whether poor people should be able to decide whether to borrow money on the terms that capitalists want to loan it (assuming consumer credit regulation allows this) or on the terms that non-profits want to loan it. Chances are there will be more money available to poorer borrowers but on more onerous terms, reflecting the greater risk of the new borrowers that are brought into the market.
Who should get to decide whether poorer borrowers get their opportunities to become entrepreneurs: charitable donors, government regulators or markets? I have contributed to Grameen because I think it’s a worthy cause, but I would also buy SKS stock if it looks like it could succeed in the market. Where is the conflict?
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Three important differences between the two situations; though they are variations on a theme:
1. As a donor, I don’t care if the loan represented by my money is returned to Grameen. Ideally, the loan is repaid so another micro-loan can be reissued but even if it doesn’t it has aided a poverty stricken person in some manner. I certainly wouldn’t want Grameen to be as aggressive as possible in recovering the loan money. As an investor in SKS, this is not the case. My money goes to SKS with the goal of a ROI for my portfolio. If the same person with the same loan defaults on the money they’ve received from me via SKS, I’d want all of the legal remedies to recover to be exercised. In utilitarian personal finance terms: money to Grameen isn’t coming back and I consider it a tithe and I’ve received the utility that I wanted for the money, money to SKS better come back with interest in order for me to get the utility that I intended to get from it.
2. While there is economic value created and sustained in the community by the loan itself, any loan given by SKS ultimately has as it’s goal to take money out of the system instead of inserting it like Grameen: the interest SKS makes goes to a shareholder, Grameen’s goes to providing more loans. (Defining community as those served by microfinance loans, though in Grameen’s case I believe each ‘branch’ is self-sufficient.)
3. Competition for human resources. If I’m working for Grameen, I’ll put in long hours for lower pay because any hour that I give up unpaid is directly benefiting the impoverished. With SKS, free work is benefiting a stockholder. Habitat for Humanity has a lot more volunteers than your local construction company. I don’t picture any economic development clinics at law schools as being interested in providing pro-bono services where the value ends up in the hands of a stock holder instead of those they are truly trying to help.
The conflict is with the un-stated fiduciary duty of the current model of the microfinance world. That is, the goal is to provide money on the best possible terms for the borrower while still allowing the lender to continue it’s operations to aid more borrowers. The opposite would be true of SKS. It’s counter-productive for SKS to explain to a potential client any of the differences above; but Grameen will incur costs in trying to explain to communities these differences forcing them to spend less on aiding the communities. When those taking the loans in a community are on the understanding that they are with Grameen, that implicit microfinance fiduciary duty is intact–when an IPO-backed lender comes in, that understanding of that relationship may still be there but only on the side of the borrower. Fraudulent is probably too strong a word; but if it is, I’ll let the reader decide a better word.