Interview with Dr. Vikram Akula

MF FOCUS: How do different technologies you use such as wireless POS, smart cards, and mobile banking decrease transaction costs?

Dr. Akula: Certainly one of the major problems in microfinance is high transaction costs, because in doing millions of tiny loans there are high transaction costs. Things like technology, particularly mobile banking, help crush the costs in two ways. One is the data that’s transferred doesn’t need to be done manually; so you can avoid manual pass-codes, manual ledgers, etc. to get a digital movement of data. This is much more efficient, more accurate; it avoids error, and reduces the scope for fraud. So you get a lot of efficiency in terms of data transfer. Then, if you use mobile banking to also do cash movements, if you use it as a cash substitute to either transfer a loan or make a payment, you eliminate all the problems and difficulties of dealing with large amounts of cash.

MF FOCUS: What specifics of SKS’s Ultra Poor Program help you reach the ultra poor?

Dr. Akula: When you are doing microfinance it works very well for those who are economically active; someone who has no assets, a landless laborer, or someone with some assets, one buffalo or a small home-based flour mill for example, you can use that working capital to expand their income opportunities. A segment, however, that has difficulty doing that is the ultra-poor. Here I mean the elderly, widows with a large number of children, disabled people- people who are so destitute that if you give them a loan it will actually make them worse off. What we have done at SKS is instead of force fitting them into a loan program, we realized that they need something different, a broader set of activities that help them move to the next level of livelihood. So we started an ultra poor program that is done through our nonprofit to give ultra poor people the tools they need to get out of poverty.

MF FOCUS: Do you think MFIs in India should adapt the Grameen II model, which is being used in Bangladesh, or stick to the Grameen I model?

Dr. Akula: I think the Grameen II model works when you have a very long history and have established a long credit culture. I think India is premature to do that, I think there is still merits in using the group model, because we need to first continue to still lay cultural ground. It takes time before we can do something so individualized, which is what the Grameen II model is really about.

MF FOCUS: Would you explain the key elements behind why SKS is one of the world’s fastest growing MFIs?

Dr. Akula: There are three things that have driven our abilities. The first is that we use models that allow us to access commercial capital to overcome the problem of funding constraints. Today we don’t have a funding constraint, we are able to leverage equity and can go to any bank in India and get as much money as we need. The second thing we have done is drawn on the best practices in the business world in terms of capacity; we’ve looked at Starbucks, Coke and other companies to understand how they have scaled very rapidly and then applied those principles to microfinance content. High levels of standardization and automation have given us the ability to scale very rapidly. Third, using technology so that all of our branches across the country are automated helps us reduce costs.

MF FOCUS: Amidst the current financial crisis, how does SKS maintain its high growth rate?

Dr. Akula: We have actually continued 100% growth, so even amidst the crisis we are actually doing quite well. This is largely because the underlying businesses of the poor are largely insulated from what’s happening elsewhere with the financial crisis. The informal sector by definition is not tied into the formal sector, so there we see underlying businesses continue to be vibrant. Partly due to the regulations of banks that require them to lend some amounts to private sectors, banks still have to lend to us. Today we are in a position where underlying businesses are doing well and banks continue to fund us.

MF FOCUS: How do the practices of social performance management and transparency affect the financial sustainability of SKS?

Dr. Akula: I wouldn’t say it affects our financial sustainability, because it is part of what we do. In order to provide good customer service, we’ve got to do it in a financially transparent way. In terms of financial transparency, financial literacy and treating our customers well, we see that in part and partial to being a good business. To create long-term shareholder value you want to treat your customers well so they will be loyal to you and then stay with you. We don’t see the two as a conflict at all, but in fact see one as a prerequisite for the other; unless you treat your customers well you won’t develop long-term sustainability.

MF FOCUS: How do you compete against competitors who don’t practice transparency?

Borrowers are quite savvy; we underestimate their abilities. Borrowers realize whether they are being taken advantage of, and though maybe not in the first loan cycle, they eventually will, which helps us.

MF FOCUS: Do you consider multiple borrowing to be a threat? If so, how do SKS and the microfinance industry as a whole deal with it?

Dr. Akula: Multiple borrowing I don’t think is a problem as long as we are meeting the need of the borrower and not exceeding the need of the borrower. The real problem is over indebtedness versus multiple borrowing. You can have three or four MFIs give a loan to a borrower and meet her need. What we need to do is not say that multiple borrowing is bad, but ask how we understand multiple borrowing so that we are not over-indebting a client. This will involve loan officers spending more time understanding what other loans are being taken and then adjusting accordingly.

MF FOCUS: What is the potential of micro-insurance in India? Does SKS provide micro-insurance? If so, what are the features of micro-insurance? What are the challenges in providing this service?

Dr. Akula: Micro-insurance is an extremely important area, and in some ways even more important than lending. This is because the poor live with tremendous risk- drought, crop failure, any kind of external shock puts them into a worse spot so insurance is significant. At SKS we offer a credit life insurance policy, retail insurance (often called home life insurance), health insurance and are continuing to expand the basket of insurance products. In terms of challenges, difficulties lie in how to explain the ins and outs of insurance policy (preexisting conditions, exclusions, etc.) in a way that makes sense to our clients.

MF FOCUS: What is your message for young social entrepreneurs who wish to get into the industry?

Dr. Akula: It is a perfect time to get into this industry, because it is a thriving industry and has huge social benefit. If I were a young person, this is absolutely the place, the sector where I would want to be right now. I encourage young people to spend as much time in the field as possible, the more time you spend in the field the more you will understand how this business works and how poor people live.

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An Introduction

Vikram Akula was named by TIME Magazine as one of the “People Who Shape Our World” in 2006, the annual list of the world’s 100 most influential people. A former management consultant with McKinsey & Company, he has over a decade of work and research experience in microfinance. He was a Fulbright Scholar in India, during which he coordinated an action-research project on providing micro-credit to farmers. He was also researcher with the World watch Institute, where he wrote articles focused on poverty and development, and has worked as a community organizer with the Deccan Development Society in India. He holds a B.A. from Tufts, an M.A. from Yale, and has a Ph.D. from the University of Chicago. His Ph.D. dissertation focused on the impact of microfinance. He has received several awards for his work with SKS, including the Echoing Green Public Service Entrepreneur Fellowship, Ernst & Young’s Entrepreneur of the Year Award in the Startup category (2006), and the Social Entrepreneur of the Year Award (2006) from the Schwab and Khemka Foundations. Vikram has also been profiled in numerous publications, including the front page of the Wall Street Journal.

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