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The New Controversy Over Microfinance The New Controversy Over Microfinance

The New Controversy Over Microfinance

by Joe Ippolito
August 25, 2010


 

We talk a lot on this site about the balance between doing good and doing well. We love when major corporations use their influence to help people. We commend charities for hiring former industry leaders to help improve efficiency. We all seem to agree that the continued blending of the for-profit and the nonprofit space is a positive thing. Except for when it’s not.

In India, a fight is raging that brings a clash of these two worlds to the forefront. SKS Microfinance, an organization designed to grant small loans to villagers, has just gone public, raising $350 million through its IPO. It’s an interesting move, considering that SKS was originally a nonprofit (they switched the model in 2005). Moreover, depending on the IPO’s success, it’s a move that could trigger other microfinance organizations to do the same.

Since March of 2009, SKS has added more than 50 branches in order to keep up with demand for microfinance loans, which typically amount to less than $200 (an amount too small for larger, traditional banks to consider). According to SKS, the stock sale will help fuel the company’s rapid growth, which will enable them to help more people in need. And there’s certainly no shortage of those. According to the Associated Press, demand for these loans in 2008 exceeded supply by more than $47 billion dollars. Billion! With that sort of need, clearly no one would object to SKS attempting to raise money in order to lessen the gap.

Yeah, right.

The response to SKS’s IPO has been nothing short of scathing. Grameen Bank's Muhammed Yunus drew a comparison to loan sharking. “By offering an IPO,” he told the AP, “you are sending a message to the people buying the IPO there is an exciting chance of making money off poor people.” But, really, what does he know about the microfinance industry? He’s just the guy who won the Nobel Peace Prize for basically coming up with idea.

Obviously, Yunus has a point. While the IPO successfully raised needed funds, it made SKS ultimately accountable to its shareholders, rather than to the people it’s attempting to help. These shareholders, of course, will be looking for significant returns from the company. Theoretically, this could lead to SKS raising interest rates on its loans, avoiding making riskier loans, or otherwise enacting policies that run contrary to the spirit of microfinance in order to guarantee results for investors. Basically, to keep its shareholders happy, SKS may someday need to act like the sort of large bank it was originally designed to counter.

It should be noted that Yunus’ company, Grameen Bank, is in the same business as SKS. They’re, at least in some way, competitors. And while Grameen’s 18.5 percent interest is well below SKS’ rate of roughly 28 percent, they’re both far less than the 36-72 percent charged by village moneylenders. One major difference between the companies, however, is that the borrowers themselves own well over 90 percent of Grameen’s equity, while the vast majority of SKS was, even before the IPO, held by private capital.

While that sounds a bit damning, it’s that infusion of private capital that has helped fuel SKS’ expansion and allowed the company to grow exponentially faster than Grameen—something that has, its supporters say, enabled them to make more loans and, in turn, help more people. It’s a pretty logical argument when you consider that SKS now serves more than 90,000 villages. Couple that with the fact that the company now employs more than 21,000 people at wages comparable to commercial banks and you can easily make the case that they’re also helping bolster the country’s economy through job creation.

According to Yunus, SKS is headed in the wrong direction. But it also seems like they’re doing a bunch of good. You can see where this gets confusing. Take into account the additional controversies surrounding the IPO and it’s hard to know just what to think. There are persuasive arguments for and against. It’s a fascinating debate that’s sure to help shape the future of the microfinance industry. You might say that SKS is merely making money off poor people. On the other hand, if everyone’s making money off of poor people, you might say that SKS is just doing it better.

 

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