I wish to share a few points
Old wine in a new bottle
1. The terms Micro credit and Social business are all ‘old wine in a new bottle’ Early in eighties, the term ‘weaker section credit’(akin to micro credit) under Priority sector portfolio has been introduced under social banking concept by RBI for Indian Commercial banks embedded with all social elements in built in district credit planning (DCP)exercise. Taking cognizance of the needs of pro poor credit linked government programs and potential for credit absorption in the given area, multiple number of social business or micro enterprises schemes under the sectors viz., Agriculture, allied to agriculture, small industries ( village &cottage business enterprises), and service sector have been formulated for DCP and implemented in coordinated manner by all the players including government also having common stake in poverty cure. Despite meticulous planning, lot of assumption in the demand side particularly in availability of supporting services for effective functioning of this credit has to be made consequently impacting limited success and unequal distribution of benefit of financial inclusion in poverty segment... However ,those with some wherewithal and capability, are benefited with credit input. Who are they ? Are all the poor in pyramid equal in entrepreneurial skill ? Who is accountable for inequality in distribution of benefits of social business ? debatable one
Dynamics of micro credit functioning for social business
2. What ever the nomenclature placed on the ‘credit’ (micro credit, or social credit, or weaker sector credit) and the business mode(commercial or social), the functioning of the credit is the same and it varies because of human diversity .Therefore, depending on needs of the poor in different layer in the pyramid, more value addition (credit plus) to it in terms of linked supporting services (financial and non financial) alone can yield value added out/outcome to the desired level equally for all the poor irrespective of position in the pyramid.. In the case of social business/micro enterprises or any kind of such income generating (IG)activity, during pre sanction of credit, development of entrepreneurship/business acumen to the poor (capacity building) seems to inevitable value addition for which grant/ aids/ undertaking from other stake holder of poverty cure including government has become a ‘sine quo non’ for success of social mission. ( In India, NABARD makes some grants to MFI/NGO for capacity building). Further, post sanction of credit period also requires services like power, communication link roads ,marketing etc., (depending on type of social business activity financed) for blending of social purpose with sustainability . Managing dynamics of social business financing with expected ‘trade off’ is therefore, a true challenge for MFIs. This issue assumes more importance in India since RBI has made a mandatory for NBFC-MFI to maintain 75% of their aggregate asset under IG activities
3. Poverty reduction need to start from the bottom pyramid for which sequenced MF inputs such as savings, insurance etc with capability building. Credit need not come first. (CGAP pilot projects)Only after graduation with acquired business acumen to next level, credit plus inputs have role to play for ensuring a protected environ for a sustainable business and IG for all in the pyramid. The focus in all the above argument is only to strengthen the effective functioning of the credit towards sustainable reach of social goal with the given diversity in both human being and geography as well and not undermining the credit value for the said task.

It is always a pleasure to read the views of Prof. Yunus on Micro finance and now on Social business. Profit earning by MFIs may not be a bad proposition so long profits are ploughed back for the benefit of the poor. So long, equity in MFIs is contributed by the equity firms/outsiders and not by MFI borrowers, there will always be a conflict of interest between equity owners and the borrower beneficiaries.

Prof Yunus has been at regular intervals raising the issue that micro finance is only meant to be done as a not-for-profit activity and it is never meant to be done as a for-profit activity. let us consider two situations:

1. An NGO-MFI which is a not-for-profit MFI lends to the poor at 35% p.a. Further it has weak controls and systems and hence there is high level of staff fraud and clients are put to hardship becuase many times clients who have paid instalments are shown as overdue and they need to prove they have paid. also because the NGO-MFI does not have access to regular bank loans, it is unable to meet its committed dates for loan disbursal, furhter putting clients to hardship. Since it does not have too much managerial bandwidth, it does not carry out any significant social activities

2. A for-profit MFI lends to the poor in the same district at 25% p.a. Further due to its outstanding controls and technology and systems, it is able to ensure high level of discipline in cleint servicing and staff frauds are almost unheard of, leading to peace of mind for clients. also due to its strong management and high governance, it is able to access bank loans and able to meet clients' needs for loan disbursement on committed dates.

Now, out of these two, which is the better one? from the client perspective? surely the second one which is a for-profit one seems to stand out clearly as the better option to the client.

And for every for-profit MFI which is known to be usurious in lending rates and greedy in profiteering, there are equal number of NGO-MFIs which are corrupt and carry out any number of mal-practices cheating their clients.

We run Equitas Micro Finance, based out of Chennai, India. This is a for-profit MFI. However we have many internal caps as per policies laid down at the Board level:

1. We have had internal lending rate caps in place right from our inception in 2007. thus, our lending rates have always been hovering between 25.5% to 27.5% through the last four years as against the latest RBI cap of 26% laid down recently
2. We target a RoE of abotu 20% but have a cap on RoE at 25%. This means that if the RoE ever looks like increasing beyond this level, we have to necessarily reduce our lending rate to remain within this cap
3. We have a cap on managerial pay at 40 times the lowest field staff salary, which is in line with the best and most prudent global benchmarks
4. We offer insurance to our cleints for protecting life, property or our portfolio. However as a policy we dont make money on selling insurance and the commission which is otherwise due to us, we get the insurance company to pass it to clients by reducing the premium
5. we have created arguably the world's best MFI model in terms of technology, systems and processes ensuring semaless and efficient service to clients and staff fruads are almost unheard of, leaving the cleints at peace
6. we also undertake a variety of social programmes including primary health camps (over 700,000 people have benefited from this so far), skill development training programme (over 225,000 people have been imparted training), running 50 tuition centers which are after school education support to children of our members, running 4 schools giving holistic education as a game changer to children of our clients and smilar background children etc. We spend about 11% of our profits on these social activities besides earmarking 15% of our networth for the creation of school infrastructures.

Yes, we are a for-profit MFI by our constitution, but we would be happy to stand up to be measured by anyone who desires to do so. we can stand head to head with any MFI, whether for-profit or not-for-profit on any of our practices which are all built on strong focus on fairness and transparency and value systems.

So, are we to be regarded as a fine example of an MFI which is focussed on giving genuine service to its clients or are we to be regarded as a 'loan shark' since we are a for-profit MFI by constitution?

Are MFIs to be judged more by the constitution of their formation and not by what they do to their clients?

Neither me, nor Equitas are at a level where we have the abilty to influence the thinking in the sector at the global level and hence this writing of mine is unlikely to reach Prof Yunus. But I hope someone who reads this and has the stature of reach the same to Prof Yunus would kindly do so and seek his feedback on the same. I would be happy to stand corrected if my line of thinking is not right.

regards/vasu

I am not in agreement with the former MD Grameeen Bank and “commercial programs only should use the term credit”. The issue drives directly to the definition and contents of microfinance.

Credit means confidence; this does mean that even tough a potential borrower has a very big asset, the lender may refuse a loan because he doesn’t trust him as a good payer or for whatever other reason like the probable use of the money for different purposes it was asked for or lack of capability to use it in a way to pay back the money.

This has been the credit’s basic concept over the last six centuries when some traders-merchants in Florence pioneering the modern banking. In this understanding any word integrating “credit” (micro, macro and so on) has to respect the roots of the term; on the contrary it will mean something else, if and when we want to call things by name.

We witnessed situations all around the world where the term credit has been abused and it lost the genuine meaning because both lenders and borrowers (and here is the welding point between terminology and contents) signed an “unfortunate” credit contract. It happened that some lenders - although being aware that the borrowers most likely wouldn’t have respected their obligations for lack of ability to evaluate the demand for, lobby, political pressure, not eligible, etc., they lent out the money. Even the borrowers some time have been aware that in case of default nothing would have happened to them because lack of appropriate law to recover credit, lobby, lack of guarantee, political pressure, etc.

Any practitioner has a direct experience of above because, among other things, in the field there has been confusion between credit and grant.
The failures of microfinance as a means to fight poverty are worldwide recognized, as it has been highlighted by the reports produced by the major funding agencies. Credit is a factor, among others, that may contribute to above goal.

To face the situation and put in order on uncontrolled growth of microfinance industry, the national monetary authorities have been issuing regulations to canalize and monitor variegated realities of the MFI.
In my perception of the situation, the related laws, by and large, take into account the “The Core Principles for Microfinance Industry” within Basel III regulatory framework; in this way, there will the road mapped out, at least.

The above-mentioned document defines three groups of institutions: Banks (B), Other Deposit Taking Institutions (ODTI) and Microcredit institutions (MCI). The MCI, namely institutions that lend for limited amount without being authorized to collect deposit, shall have a different supervisory treatment and the Consultative Group left to the countries’ supervisory authorities the modalities and instruments to intervene.

Moreover, MCI are they a homogenous group? The answer is: Not. We do have to consider that MCI group includes both profit and non-profit organizations. This is a crucial point. In the current trend of microfinance industry: all MFI have social objectives as a common denominator but different approaches to attain them.
Consequently, it is a necessary to look into MCI group that – in my view - includes three big categories of organizations providing financial services for: Enterprise Development (ED, accumulation), Income Generating Activities (IGA, increase family income) and Food Security (FS, distribution of basic food to very poor people). These organizations deserve different management rules and evaluation criteria. This is an important starting point when investigating on the contribution of microfinance to food security, to fight poverty and climate change. In this context, I am not sure that the money provided to IGA and FS groups could be under the title credit. See: http://www.microfinancegateway.org/p/site/m/template.rc/1.9.51017/
By doing so, microfinance will be pro-poor and commercial, without misinterpretation and mystification.

Second awkward question: are we sure that all human beings are innately entrepreneurs? To fight poverty does one need to become entrepreneur? To face poverty's problems we should look beyond microfinance. The fact is that microfinance and micro credit have been used and abused as instruments of economic policy; in reality, they can do very little without addressing other linked issues at macro and meso level.
The degeneration of capitalism is a different story like an other story is the insatiable appetite of micro lenders in Pandra state (India) and elsewhere.
Besides above, the lenders are entrepreneurs-scout. Are they? The role to promote entrepreneurship belongs to other institutions. It is sensible to distribute thousands of small loans to find out an entrepreneur? The question is challenging that deserves attention and careful thinking because, again, the answers directly drive to the hearth of microfinance concept. My question is: are we sure that all human beings are innately entrepreneurs? To fight poverty do all poor people have to become entrepreneurs? 


By and large, even a genuine profit enterprise achieves a social goal by creating jobs and paying a salary. In this understanding social enterprise does already exist, unless we want to change the etymology. Any MFI has a social value mission. 

In my view there is the risk that the terminology (social enterprise) that has been coined in a laboratory could complicate the understanding of what is going on in the field. Are we going to give a name to unborn businesses? Instead of discussing about social enterprise, social return on investment, bottom-line enterprise, double-bottom line enterprise, etc, it could be better to say, “Enterprise socially oriented”. Indeed, at the end of the day we have to measure the degree of satisfaction in terms of social objectives and to evaluate the impact of the intervention. 

Having said that, in my opinion the problem is to know how much “social” is incorporated in an organisation and then how to organise it (MFI) in order to achieve a maximum of a social mission and make it a sustainable enterprise. 

The growing of the MFI movement has created great expectations on the grounds that as grass root organisations they can easily interact with their own environment. I do say that this is correct.

However those expectations have entered into conflict with the survival of the MFI industry itself and all around the world the practitioners have been facing this challenge, namely how to provide target beneficiaries with a “durable” service. So, the real problem is how to blend social objectives with sustainability.

Hopefully, there has been an ever-increasing consensus in the fact that there isn’t contradiction or conflict between financial and social performance. Indeed, the field experience, among the other lessons, has demonstrated that financial and social performance can be conjugated together and, as a matter of fact they complement each other while respecting a good management practice. 

Moreover, having in mind a given management benchmark, the social enterprise objectives can be achieved referring to informed decisions.

Ascanio Graziosi
www.cambridgedata.com/GraziosiAscanio