Microfinance pioneer Prof Yunus raises concerns over SKS IPO
- Friday, April 9, 2010, 8:34
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Prof. Yunus
Microfinance Focus, April 8, 2010 (Nairobi/Kenya): Microfinance pioneer and Nobel Laureate, Dr. Muhammad Yunus has raised several concerns over SKS Initial public offerings in an exclusive interview with Microfinance Focus on the sidelines of Regional Microcredit summit at Nairobi (Kenya). SKS is an India based fastest growing NBFC- Microfinance in the world. SKS plans to raise $250 million through an initial public offering (IPO).
After the controversial IPO release from Compartamos from Mexico, SKS is the second Microfinance Institution to issue IPOs and many more MFIs may be following the trend. He said, “This is coming from the banking side, from the profit maximizing side and I am opposed to that. If they do it, I cannot stop them but I would encourage genuine Microcredit programs.”
Further he explained, “The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good.
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In the context of Dr Mohd Yunus, My comment is as follows.
To take a moral high ground when it comes to lending to Poor is actually funny. According to this line of thinking companies can make money only lending to Rich and middle class and call it a business opportunity??? Why lending to Poor cannot be called a business opportunity??
Vishwanathan, Professor Yunus isn’t against profitability of MFIs, instead, he highlights that when MFIs take the IPO route, the financial motivation exceeds the social motivation by far. And that is very troubling in many ways…
At the risk of differing from the Nobel Laureate, I categorically assert that the current microfinance should not mix business with charity ; and that for scaling and sustainability reasons, the microfinance muste be treated as business ; and finally that from the private greed of the commercialised MFIs will emerge the public good of assistance to the poor , as Adam Smith had so eloquently pointed out. We salute those who want to be altruists, philanthropists and contribute to the social upliftment and povert alleviation and their ideals and nobility is to be pursued by one and all , INDEPENDENTLY and not as part of business!
Dr Satchidananda Sogala
FOUNDER & DIRECTOR,
GLOBAL MICROFINANCE FOUNDATION
It is sad to see the man who put financial services for the poor in the centre of economics struggle so hard to please his microcredit uncles and aunts. GrameenBank shows that profitability of MFIs is necessary for 1. Their sustainability, 2. Their sustainable growth – to help more poor and rural citizens, and also the less poor living in those areas where there are no banks and 3. to demonstrate that the poor are no “charity cases”.
His own organisation decided under his leadership to take deposits from members and the general public (although the latter seems to meet challenges with GB’s legal status as a village bank) in order to respond to poor people’s first financial services need, to protect and prudently manage the little poor people do have. These deposits and (fixed, especially contracted, longer-term) savings provide also voluntary, reliable and cheaper funds to manage risks better and, thus, get costs down. This is a complex business that is successful because of the integrity of the people who undertake it; bankers with integrity.
Prof. Yunus makes a serious when mixing charity and business and calling it “social business, it is a paradoxical term that produces failure of business and sustainable poverty alleviation”.
Pleasing his uncles and aunties will postpone the full realisation of the potential of Microfinance.
Regards, Peter
The mixed comments on prof. Yanus’ concerns about SKS IPO come from the field reality where MFI may run business having different objectives and strategy for achieving outreach. Since some time, I have been proposing to group micro lenders into three categories: enterprise development (accumulation), income generating activities ( increase family income), food security (distribution of basic food to very poor people). By doing so, we will avoid misinterpretation and confusion. The forthcoming document on Core Principles for Microfinance industry prepared within BASLE framework by BIS should take into account of above.
Ascanio Graziosi
Banking Consultant & Microfinance Specialist
Mr Yunus concerns are quite justified considering the status of industry. I feel focus should be more on prudent use of investors money that they are going to raise through this IPO. If it were just to scale up their microcredit programme by accessing cheap funds and incresing their bottomlines than i seriously have my concerns. If this money would be used to create an ecosystem of providing a complete set of community servives (like grameen bank) to its clients apart from expanding its core business, it might lead to long term sustainability of Organisation/Sector. The social capital that this sector considers as collateral for ensuring their recoveries is becoming very weak. This sector has been commodified by entry of N number of MFIs every year providing same set of services. In such a scenario big MFIs like SKS, SPANDANA or SHARE will have to take a lead to differenciate their services which might come at some cost but at the same time it may be looked as an investment ensuring long term sustainability of this sector, specially in India.
If this were not to be we might see this sector collapsing due to overleveraged clients, weak regulation, shortage of trained staff etc. The same MFIs which are now going for IPOs may then be looking for bailouts (which is the IN THING these days)
prof. Yunus is right when it comes to integrity but micorfinance is banking by its meaning: Lent money is given away. It might be returned and it does cost an interest. The banker judges the idea and the way the debitor wants to spent de money. If a banker needs to judge whilst he/ she also guarantees a profit to backen the money ‘owners’ he cannot!
I see microfinance as the possibility for the have-nots to use money as every other one can do in this world. They should be judges as every other one too.
MIcrofinance is not a new way to make money, it is the signal EVERY banker should see: It is the only way back to banking: Using money instead of just possessing (or worse: creating) money!
The mission of an MFI does count but if we look at Bank Compartamos’s case, we have every reason to believe SKS will follow the same route. Microfinance ‘is’ a combination of business and charity (i.e. financial and social objectives) but this equation requires a delicate balance, and that is what many people fail to realize.
I agree with Prof Yunus. The profit motive of investors may not fit the scheme of things right now. Some one would project that companies are making money at the cost of poor. MFI movement would attract the wrong kind of attention from politicans etc and create problems.
This is the debate we have in our side of the world too. Guaranteeng sustainability does not necessarily means being greedy . Micro finance must be identified as the Tool for Poverty Alleviation . Micro Finance is not the Goal and should not be . It is important to be sustainable to be able to serve the poor > the main issue here is sustainable development and poverty alleviation. Can’t aim to make more and more profit as a private business seeking accumulation of wealth ! The balance between Social and financial objectives is like the need for the heart and the brain . You can never live with only one of the two !–
Thank You : Palestinian Businesswomen’s Association “ASALA”
yes, it is not fair to go ipl by sks any micro fiance institttution. It gives a message that micro finance is money spinning industry and it contaminates the service field with profit making tycoons. I do apreciate and very much with dr mohd younus.
s.ayyanagoud micro financestudent
and fan of dr.Mohd younusji
While accepting that Dr Yunus is to rural finance what Newton was to Physics, I do have a difference in opinion over this particular matter as expressed in the interview. . A profit motive is superior to an ulterior motive that invariably creeps in, in the absence of transparent access to information and the lack of regulatory mechanism to prevent misuse of privileged information. Participation in capital markets including stock markets forces MFIs to disclose information which they could earlier hide. Case in point – what Sriram has brought out in his paper would simply not have been possible if SKS, Share and Spandana refused to disclose information relating to changes in ownership pattern. Listed companies cannot simply play around with the interests of minority shareholders (as was the case with MBTs with the poor as investors) if the market regulator is watchful without attracting punitive action.
I am not sure Dr Yunus’s position is adequately reflected in the interview. Grameen Capital India, a company that has been formed with the collaboration of Grameen Foundation, Citi group and IFMR trust facilitates equity and debt transactions. In the event of equity transactions, it is conventional knowledge that the best exit is through an IPO.
Regards,
Atul
in my point of view
there is a big danger to only consider micro credit and micro finance as a business
we discover every days on the field, the consequences of the profit race…overindebtness is the most powerfull illustration of this terrific trend
it is not accpetable
this market has to be regulated by local and internaitonnal autorities and consider as a social business to avoid catastrop in the next few years…
we know what will hapen with such evolutions, ipo’s, cdo’s, funds and so on…
be sure the same causes will generate the same resutlts…but this time with poorest people of the planet..
are you ready to take taht risk???
Arnaud Poissonnier – ww.babyloan.org
Is it an either or proposition, given that there are good arguments that can be made for each (both positive and negative), or can the “social” and “business” models work simultaneously? It seems that the business model is an inevitability that those in the field have to contend with. But will an escalation of the business model eventually push out the “social” model?
While both models have different drivers a social model is not necessarily a charity or unsustainable as Grameen and many other MFIs have shown.
Naheed Islam
Independent Consultant
While I agree with Dr. Yunus that the business should necessarily work on the Social Cause Concept Model, it does not mean that the Poor should not be treated as a Business Opportunity. Unless and until the investing masses agree with this concept as an opportunity to earn while being a means to end poverty, there would be very limited avenues for Micro finance or Micro credit to be able to access funds. Having mentioned this, the MFIs should approach the business in much larger spectrum rather than focussing only on lending as a means to bring the poor out of poverty. These would broadly be categorized as Infrastructure (as in providing various operation services to the clientele, SHGs etc., Remittance services and proper housing avenues), Information, Investment avenues (Micro Insurance and Micro Pension services) and finally Livelihood. By doing this the funds so generated from IPOs would be utilized in more productive areas while continuing to serve a larger social cause. This will not only give a Robust business model for investors and also move towards de-leveraging the end customer to a large extent.
Ramakrishnan Iyer
Senior Vice President at Kotak Mahindra Bank Ltd
or MFIs to go core commercial through Initial Public Offer (IPO), will increase the burden of the end- users of their services – the poor.
The expected dividends on investment in MFIs will negate the aims and objectives of poverty reduction.
However, if MFIs should apply conventional banking practices, there is need to establish another financial institution perhaps referred to as Pro-Poor Financial Institutions (PFIs)
The major sources of finance for PFIs should be Central or National Bank Consolidation Fund, Government grants, Private Sector CSR, charity donations from individuals and philanthropic organizations if financial access at reduced interest rate to the poor can make impact on poverty reduction.
Alphonsus C. Nwoye.
Some of the contributors do, as Prof. Yunus, mix charity and professionalism by using the term “social business”. Any business that is self-sustaining is commercial and thus makes a profit. The intention of the owners and management is the level of profitability and the way it is used. Not every business is about profit maximisation and return to shareholders who do not care about how business is done or about consumer protection.
A social business integrates social politics and thus endangers the self-sustainability of the business. It can thus never be regulated as a professional business; governments, donors, NGOs and civil society can always criticise, call for borrower resistence, interest rate caps, nationalisation of banks, force financial organisations to do this or that.
It seems that there is no third, alternative, model that can successfully,clearly and consistently combine business with social politics. That is why I plead for a clear distinction between Microfinance as a tool for building an inclusive financial sector, with INTEGRITY and proper performance criteria, and MF as Microcredit for sociopolitical objectives. It is clear that profit maximisation, full return of profits to owners is not an act of an integer banker and that is what can be regulated. Unfortunately, regulation is often ex poste, meaning that in this case we can only judge whether the IPO of SKS hurts the poor and benefits a few people who want to get rich over the backs of the poor, only after the event. SKS was founded by socially aware, integer people, let’s hope that the new owners will be so too. But let us not condemn a priori.
But if a country agreed that the funding source of MFIs should be social funds, from government and foreign donors, then the logical and pertinent consequence MUST be that these MFIs cannot and should not be part of the formal financial sector and, consequently, will perpetuate dependency on benefactors and the clients will be “charity cases”. A compromise of mixing charitable funds with commercial funds is not effective, please look at the banking sector.
Regards, Peter
Oh, most scholarly presentation by Peter. None could have brought oiut issues in a balanced and correct perspective. I feel proud in joining Peter whole-heartedly on this poser caused by the Father of Micro-Finance.
Let us all keep passion, sympathy and empathy in our social call towards unfortunate beneficiaries of Financial Inclusion. Let us enable them towards firmly moving towards the lofty goals of provision of security, education, housing and food in the reverse order of priority through Fiscal and Charity route without hesitation outside market-economics.. But no mistake is made as far as financial sector frameworks are concerned but eschew clearly and effectively the talk of free-lunch. It’s a misnomer.
Further, how private and other forms of funding with cost can flow to those who are financially excluded without any market determimned approaches, when the unfortunate sector needs a large chunk of scarce funds. The malady lies in our confused thinking and not with those targeted groups.
As Dr.Younus showed us, ‘ MF commences with self-micro savings and ends with self-micro savings for permanent wealth creation and sustainability’.
They know their onions well and would like to stand on their own legs.
Let us not look at them as those holding permanently begging bowl in their hands. They will detest such outlook.
Thanks a lot, great Peter, I salute you for your understanding of issues involved with precision..
My sincere apologies to Dr, Younus, a God-like Sage of Micro credit innovation. Please grant pardon for my strong reaction..
With love and best regards
Subramanian Sankaranarayanan
Adviser & Senior Management Consultant at Gradatim IT Ventures (india) Ltd
It is true MFIs have been promoted with a social objective of poverty alleviation but it is equally true that these are developed to cater to the needs of poor both for consumption and for business or employment development as doles and charities are no longer liked by poor who would love to earn his livelihood on his own if appropriate opportunity for the same could be created for him. No institution would also like to remain dependent on donors and donations and therefore it is really a healthy sign to source fund from the market by the MFIs also. I am proud that MFIs have started to realize the need for dignified self sustenance and promoters are also gradually handing over these institutions to the public and beneficieries. Dignity both in indivividual and instiution is much adored quality and the latest move of SKS is therefore commendable and all those who would like to see poor people and their funding institution becoming self reliant and pursuing a sustainable business should give a pat to this laudable effort.
Dr.S.N.Ghosal
At this moment in the discussion I would like to add a comment on charitable funders and some of the socially responsible investors. Many of such funds are “endowment funds” or “trusts”. All the money collected from donors, all people donating money, is pooled. However this money is then not immediately channeled to Microcredit (MCIs) of Microfinance institutions (MFI’s) or to other destinations as that would empty and end the fund. Creators and managers thus institutionalised the Fund and for the sustainability of the Fund they often INVEST the pooled donations. If I am not mistaken , often such funds and trusts invest most of the pooled donations in normal investments, equity, of companies etceteras.
That means it uses commercial profit-maximisation means for their charitable work. We could also read over the last years, especially in the Bernard Madoff case that such charitable trusts and funds participated in fraud and pyramid schemes and thus lost dozens of millions of US$ (maybe billions) that were meant for the poor. In fact Mr. Madoff was apparently a well-seen guest in the charity world of the USA. The charities and socially responsible investors did not properly investigate how their investment were used, they took the stable 20% or so return per year as it was enough to sustain their organisations and undertake quite a number of “development work” for the poor.
Of course I cannot and do not have the means to investigate all these trusts and charities and as you can imagine, such organisations are legally not obliged to collaborate to any such investigation.
Added to that is the fact that money given for social purposes are tax deductible, which also contributed to this huge “charity” (often referred to as zakat in Islamic societies, one of the five pillars of Islam) industry, including tax lawyers, consultants, accountants and advisors.
This point is made after the main one that poor citizens and governments facing many challenges with massive poverty and rural underdevelopment should ultimately be able to stand on their own feet, thus build a self-sustainable economy. People’s deposits and tax payments are basic for building such inclusive economy,not charity, be it at home or from abroad. And that means responsible and accountable governance by public authorities and businessmen; thus demonstrating high levels of solidarity and integrity.
Regards, Peter
Well said again and true to the core as far as every nation or bloc or larger groups and communities are concerned. Geo-political systems and behavioural, cultural, religious and ethinic factors do have definite imprint on such leakages and frauds..!!
Even in India, we had Harshad Mehta and several other scams involving investible public and private funds going down the drain; the quantum thereof could have restructured rural and social sectors-nearly three fourths of the population- and catapulted them and to usher into a somewhat permanent and sustainable livelihoods..!!
Administrative tail-end delivery framework has been and is either weak, deficient, defunct or corrupt in the words of honourable and honst Prime Minister himself made before Indian Parliament in 2004-05..!!
The same story can be culled out in different geographies geo-political jurisdictions and with undisputable facts..Precisely for this major reason,
I incessantly endeavour to bring fiscal and administrative issues in all my discussions. They are first and last respomsible..!! Other charities and donors form miniscule but sizeable proportion in the uplift of the poor subject ofcourse to weaknesses and deficiencies brought out by Peter..
Transparencies and material disclosures with equitable accountability are the keys to wardoff such pathetic maladies prevalent, of which I am also a member and a willing or no-willing or helpless participant..!!
Any way, free lunch is not the solution for sustainable development and meaningful inclusive growth..
With love and regards
Subramanian Sankaranarayanan
Adviser & Senior Management Consultant at Gradatim IT Ventures (india) Ltd
Dear all,
I wish to submit four OPINIONS which I hold:
a. Financial markets have failed in the past. Market failures will happen in future!
b.For engendering optimal public good through private means and for ensuring allocation efficiency of capital through pricing, there is is no alternative to market mechanism, conceding that they are not perfect.
c. Compromises and confusions and failures are more likey when any non-market mechanism is posited as the operational model. Regardless of the intentions, feelings and ideologies.
d. Ethics, concerns for the poor and other noble feelings are admirable. They can be the starting point of exploring the sustainable market mechanism for a particular group, area or need. In other words, “social business” is a good starter and not good for the main course! It can and should jump-start the market engine!
Thanks and regards
Dr Satchidananda Sogala
Founder & Director
www. globalmicropfinancefoundation.org
The neccesity of going for IPO is felt by an organisation when it needs more fund for its expansion or serving its present network. The real objective of any expansion is maximisation of wealth and under the market economy nobody can avoid the obvious reference to ‘higher’ return for the fund providers.
Concern of respected Prof Yunusj is not only relevant but also points to the lack of well tested financing model to make the MFIs financially viable in the long run.
I appreciate the word ‘Social business’ used by Dr Satchitananda to describe the scenerio.
The IPO might help SKS to be in a better sustainable condition as far as business prudence is concerned. But when we talk about sustainability of the world of microfinace organisations, we are referring to the existing or developing models of financing which work within the main framework of the main stream economy. Whether there should be a parallel microfinace economy or the various service delivery mechanusms of main stream economy can take care of the finacial needs of the MFIs are yet to be seen and felt clearly.
Take the case of Gramin banks in India, which are supposed to be the source of finace to the ‘poor people’ in villages so that they an gradually access the main stream financial services and enrich it long run. Actually due to bad service delivery system and monitoring the fund was diverted to school teachers and small business men for better return for the banks and a ‘sediment’ of people is created in the villages without any access to the well advertised services. This ‘sediment creation’ is legacy of thousand years. Experienced and learned persons of this forum may help the mircrofinace in this regard.
Regards,
Abhyuday Chowdhury
Chartered Accountant
Let’s accept for sake of argument the Social Business model as Messrs Satchidanda and Chowdury argue, namely as a “Sustainable Market for a particular group pf people”.
A I right that this market would be distinguished and thus shielded from the “real”, normal market, with all its failures. In that case I would like to ask four questions:-
1. If the separate sustainable market is shielded from the “normal”, “real” market, would it mean that it only functions with the supply of specific donor and government funds, mixed with profits of the organisation that do not belong to the owners (or to “the organisation” when it does not have real owners as for NGOs or some Coops) , must be reinvested and that may only be at a certain maximum level?
2. What legal status may these social businesses have? Limited company, cooperatives, NGOs, foreign agencies. As there reporting and fiscal requirements differ, who would make them equal in order to create a fair “market”;
3. If it may only serve, let’s say, the Poor, what if these clients become non-poor and there are still no alternatives for them (if they live in rural, remote or poor urban areas without banks). Should they nevertheless exit or may they stay in this market? Is their subsidisation still justified?
4. If this “shielded market” may only serve the Non-marketable poor, will there not exist an incentive for providers and clients to show that the clients remain poor and the providers that they need to remain “shielded”? If that is so, can one speak of a “market” at all?
5. Is it allowed for the “shielded market” players to compete with market players, let’s say with banks and with money lenders and, if so, who would set the conditions and supervise? When would “unfair competition” set in?
6. Who determines the “market conditions” for social business?
Kind regards, Peter
Dear Colleagues
I wrote the following today in another context … somewhat similar. In my view the role of microfinance is important … but as Dr. Yunus has observed, the dysfunctional nature of the economic system is the constraint on hard work moving people out of poverty!
////////////////
My response to the dialog about the value of microfinance is that it is a total disgrace that the experts have such poor metrics. Why on earth is it that so much expensive brain-power is unable to come up with some clear metric based conclusions?
It seems from my observations over the years … essentially since 1974 … that there has been a very serious lack of understanding in the official relief and development community about accountancy and its role in the management of resources. The corporate world uses accountancy very effectively to control their assets and have a good understanding of their operations … with the notably exception of the modern corporate banking sector that seems to believe in the economic equivalent of the engineer’s impossible perpetual motion, and has not let the principles of good accountancy get in the way of this belief!
In my early days of developing management accounting systems, the idea of “key item reporting” was central to helping to understand why the company’s resources were being used. When I apply this idea to the modern discussion about microfinance it very quickly becomes apparent that the key items are very big externalities. Professor Muhammad Yunus talks about the hard work of poor people, yet they remain poor … and then goes on to talk about the dysfunction of the economic system. I would agree … but exactly what are the elements of this dysfunctionality?
My booklet (available at Lulu … http://www.lulu.com/product/paperback/hundreds-of-issues-that-impact-relief-and-development-performance/521940 ) talks about hundreds of issues that impact relief and development, many of which are very big issues that have nothing to do with microfinance and its role in development. If we broaden the dialog about microfinance to ask whether development interventions … that is interventions to reduce poverty and improve the quality of life and standard of living … are working or not, then we might get into a much more productive conversation.
My conclusion based on a long time observing development interventions is that microfinance works a whole lot better than most of the interventions funded by the international community … both the NGO community, and the official development assistance (ODA) community including the World Bank, the UN and the various bilateral organizations. To its credit microfinance aims to help by making money available to beneficiaries who must then repay … and to everyone’s surprise poor people, especially women, have had a very good record in repaying. In some cases the quality of life of poor people has improved a lot … in some cases not very much. Rarely has the quality of life of poor people deteriorated as a result of socially motivated microfinance … but this might be about the change.
Banks … stockmarkets … capital markets … have a very limited appreciation of any social metrics. When financial metrics come to dominate in the microfinance sector it is entirely possible that there will be a micro-version of the sub-prime housing finance fiasco that would have bankrupted the banks … not to mention totally wrecking the global economy … if government had not bailed them out! While the banks have been “saved”, the crisis for the banks’ clients continues … with no end in sight. Financial metrics are good … but only when they are balanced by equally good social metrics. At the present time the social metrics dimension of the microfinance industry is a shambles … and will remain in this state until the measures are as much about the externalities as they are about the microfinance performance itself.
The Key Item Reporting that is needed for social metrics for microfinance to be useful has to include information about the community. With a value accounting methodology it is possible to see whether a community is progressing or not … that is, if the quality of life is improving or not. The second question is then what is it that is making the progress (or lack of) happen? In most cases the lack of progress is because something critical is missing. Typically, microfinance does not address these missing elements … and for all practical purposes microfinance merely serves to make poverty a little less intolerable. With community value analytics these things that constrain development can be identified … and then the decision makers who control the allocation of resources might do a better job of getting resources where they are needed for socio-economic progress.
I cannot for the life of me understand why the answers to these questions were not been obtained years ago. Maybe it is because the well educated economists have tried to solve the problem of pathetic data with more and more sophisticated statistical analysis. Bluntly put … this is not how you manage anything if you are serious about getting results. You need the rather plain data acquisition that is the expertise of old fashioned accountancy … which becomes quite practical as modern mobile information technology proliferates. You need to be able to understand cause and effect … never mind getting statistical correlation all about averages that, in my view, does nothing practical to improve decision making.
I think there is light at the end of the tunnel … people in developing countries are very smart, and at some point they will drive the reform about metrics that is needed, even while the sophisticated rich country experts resist the paradigm shift.
Sincerely
Peter Burgess
http://communityanalyticsca.blogspot.com
My comment will start from the following statement of Mr.Yunus, the prestigious microfinance founder and Nobel laureate:
“The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good”..
1. If we use this logic then MFIs should ALSO on-lend their donor funds WITHOUT charging any interest on the group/ village banking/individual/etc loans. But then in order to cover their operational/administrative/staff/risk (loan losses) costs as well as to further develop their business volume/loan portfolio/outreach, the respective MFI will have to EXCLUSIVELY and FOREVER rely on free donor funding
2. A MFI, as its very name shows, is actually a FINANCIAL INTERMEDIATOR INSTITUTION, dealing with risk & RETURN, with funds attracted and loaned, and with products and services that are similar to the ones offered by the mainstream banking. Therefore the (loan) capital funding sources may be similarly provided / obtained by / from:
a. donors / owners
b. customer savings / deposits
c. investment companies/funds
d. commercial bank borrowings
e. financial markets / stock exchanges/ bonds markets
3. There are already very many MFIs that are DO NOT rely exclusively on donor funds but are ALSO funding the expansion of their loan portfolio through the use of COMMERCIALLY PRICED / INTEREST BEARING LIQUIDITY. But this does NOT mean that the respective banks and MFIs are trying to “make a profit” by speculating the poor people financing needs.
4. If a MFI offers interest bearing savings/deposits products THEN IT IS NORMAL to charge an interest for their loans in order to pay the interest (price) for using the respective customer funds. In this particular case the MFI’s depositors obtain a PROFIT / REVENUE (the interest received for their own funds deposited with the MFI ) which has to be somehow offset by the interest charged by the respective MFI for its micro-loans (covering the interest paid to depositors, the administrative/operational/risk/business development/HR development costs ). If there are (poor) customers that make a PROFIT (earn interest) on their deposits/savings, then I do not think we should blame a MFI and its funders / IPO shareholders for the PROFIT generated through the interest / fee earned on its micro-loan portfolio ….
5. THE MOST IMPORTANT THINGS that supports the idea of an IPO are the following:
a. the additional capital raised through this method is VERY STABLE and, theoretically, on an indefinite LONG TERM, representing thus a VERY RELIABLE SOURCE OF FUNDING / EXPANDING THE LOAN PORTFOLIO, as opposed to commercial bank borrowings and customer savings THAT MUST BE REIMBURSED AT MATURITY
b. the customer savings/deposits are also bearing the “option” risk of being, unexpectedly, liquidated BEFORE THEIR CONTRACTUAL MATURITY
c. sometimes, especially in times of deep financial crisis such as the one we are currently facing worldwide, even the commercial bank borrowings/credit lines may be canceled BEFORE THEIR CONTRACTUAL MATURITY, triggering thus a major liquidity squeeze on a MFI’s business.
d. the COST OF FUNDS obtained through an IPO is MUCH LOWER then the costs of funds obtained from commercial banking sources; therefore the micro-loans may have LOWER INTEREST RATES then the loans funded through commercial bank borrowings and / or customer deposits / savings.
e. the funds obtained through an IPO actually represent an equity/capital injection for which a MFI is not forced by the Central Bank regulations to set the so-called (liquidity) “reserve requirements” as it is required for a percentage of its customer deposits and / or borrowings from commercial banks and / or investment companies (thereby increasing the micro-loans interest rate).
6. An IPO does NOT mean that poor people are “…shown as an opportunity to make money out of..” It simply means that IF a MFI that makes use of an IPO is FINANCIALLY PERFORMANT (self-sustainable with good ROA , ROE, loan portfolio quality- low PAR) THEN:
a. the value of its shares on the stock market will increase
b. the MFI may decide to distribute a portion of its earnings as dividends to the respective shareholders OR to retain all the respective earnings in order to reinvest them in the further development of its business, thus serving more poor people with enterpreneurial drive…..
7. CONCLUSIONS:
a. the funding obtained by a MFI through an IPO is , in fact, JUST ANOTHER (INDEFINITE LONG TERM) LIQUIDITY SOURCE, BUT AT LOWER COST, that it is utilized to expand its loan portfolio and, implicitly, TO SERVE MUCH MORE POOR PEOPLE WITH ENTREPRENEURIAL DRIVE , THUS CONTRIBUTING TO THE PROCESS OF POVERTY ALLEVIATION.
b. some of the MAIN COMPULSORY REQUIREMENTS for a MFI to successfully use an IPO are the following:
i. a professional board, senior executive management and operational staff;
ii. a sound corporate governance;
iii. a sound internal control system (including an integrated and comprehensive software for accounting, loan tracking, financial & risk managerial reporting – MIS );
iv. a sound, comprehensive and performant financial & risk management system (including asset & liability management for liquidity, interest rate and foreign currency risks )
v. good financial / operational performance;
c. Taking into account all of the above I would have to say that, indeed, the MFIs DO HAVE A SOCIAL BUSINESS in respect to the support they provide to the self-empowering of poor people, BUT the TOOLS to achieve the respective social business/mission have to be of a commercial nature due to the basic law of “supply and demand” pertaining to a FREE MARKET ECONOMY.
d. The very ideas of financial / operational self-sufficiency (a major performance indicator meaning a MFI should obtain a HIGHER level of its INTEREST/FEE REVENUES then the level of its financial and operational/administrative/staff development/risk expenses), REPRESENTS, in fact, the basic PROFIT concept of any commercial undertaking. In other words, in order to achieve the respective self-sufficiency all MFIs, that do not (yet) use the IPO tool, are already aiming to make a PROFIT, thus “demonstrating” that poor people MAY be “…shown as an opportunity to make money out of..” However, in my opinion this is NOT the way to characterize the current business of MFI’s all over the world. Therefore, with all due respect and consideration for Mr. Yunus, I disagree with his statement according to which microfinance “..is a social business and IF YOU INVEST HERE YOU NEVER GET ANY RETURN FROM THIS…” . I have therefore to re-emphasize the idea that a MFI, as its very name shows, is actually a FINANCIAL INTERMEDIATOR INSTITUTION dealing with risks & (social & financial) RETURNS and, as such, it must be treated accordingly, inclusive of the IPO or any other financial commercial instrument utilized in order to raise capital and / or access liquidity funds for SOCIAL business development and poverty alleviating purposes.
George Staicu
Microfinance / banking operational, financial & risk management / public finance consultant
Dear Friends..Hearty Greets
In a free market setup, costs of operation, interest rates charged and or profits / losses dependingv upon various risk factors at different levels of lending / refinancing structure right from original source of funds to the ultimate beneficiaries located at the ‘last mile’ post, should be shared in an equitable manner purely driven by market forces with some tolerable weaknesses styled as ‘imperfect competition’. Inclusive approach is not only a necessity but to be pursued relentlessly to the satisfaction of all stake holders. IPO route for sourcing of originating funds at the top of the pyramid is one among many invented by financial wizards scouting to unearth possibly ‘idle’ funds as also with a view to achieving cost, interest and risk sharing / reduction / mitigation.
Having said that, let us look at another mode of market setup strictly following ‘Shariat Diktats’ under Islamic ways of funding or providing alms to poor and needy. Use of even the very word, ‘Interest’ is forbidden. However, in an indirect way, recovery of service charges or costs of operations-if need be in a transparent manner possible under watchful eyes of clergies / rulers- is administered to ensure proportionate absorption / distribution of those service charges / costs of operations including residual surplusses or deficits. Discriminated distribution based on the principles of allocation of such costs vis-a-vis quantum of social business sufferings and historical isolation of beneficiries, will definitely provide satisfaction to various stake holders with subjectivity under social justice dispensation.
IPO funding modes do not arise at all. Revered Dr. Younus and all benign advocates of forced interest rate reduction will stand ‘winners’ to that extent. Incidentally, can we think of a hybrid model incorporating the best features of free market economics and Islamic funding mechanism in search of a common meeting ground..??
Free market advocates like me will be thrown behind as losers.
Permanent sustainability conditions will undergo distortions with new-found shapes and sizes.. Innovation and innovation acceptability are the keys..
These are my random thoughts for which I hold me entirely responsible..
Any comments please..
With love, only love and love ever
Subramanian Sankaranarayanan
Adviser & Senior Management Consultant at Gradatim IT Ventures (india) Ltd
I would first like to support and strengthen Mr. Staicu’s argument on the desire to lower funding costs by attracting external investors in an IPO. In Microfinance the explanation and ‘leveraging’ of funding sources, their conditions and effects has been ill used, ill explained and deserves much more attention. When someone invests s/he takes risks and expects to be remunerated accordingly. When someone lends then the loan agreement includes conditions (also comprising securities, collateral) to reduce risk (of loss of money, the loan amount and interest rate over the lending time). Thus it is a general rule of practice that the cost of investment, in its preparation and in the overall investment contract is higher than that of loans. That risk is remunerated is logical and acceptable isn’t it? To find investment agreements between mainly western (socially responsible) investors at a RoI of even lower than inflation rates is thus not conform. Such support mixes subsidies, grants and politics with financial markets and does in my experience distort local financial sector development. That is why in Western countries this is forbidden, but they allow these practices outside their countries ……. Investment agreements, also as a result of an IPO need to comply with the logical, inherent conditions of such financial terms, if not they have a distortive effect and will NOT help the poor nor the long-term autonomous development of an MFI. In general and coming back to Prof. Yunus proposed terminology, “Social Business” combines two terms that make the sustainable full inclusiveness of financial markets, thus gradually integrating the poor, non-banked so far, in my view impossible.
Regarding Prof. Subramanian’s valuable remark on Islamic -Shariah – finance. The holy Qu’ran forbids “RIBU” but this term has never been clearly defined or explained by the prophet (MPBUH); this was confirmed by the third Caliph, Usman, who had the holy book written down. If literally translated from Arabic then the term “Ribu” approaches the current English term “USURY” and not Fixed Interest Rate. The latter interpretation was adopted, if my studies and work do not deceive me, in a parliamentary discussion after a political conflict in Pakistan in 2004, under the pressure of Islamic fundamentalists. Fixed interest rates, often called USURA in the Latin language (this “fixed interest rate” then), was forbidden by the Jews (but they were allowed to lend with IR to Non-jews!) as well as by the Christians (official papal prohibition). Under Roman times a Three-part contract construction was invented by traders that made IR Loans possible; this practice resembles contemporary shariah-compliant financial products. This practice evolved to a gradual acceptance of fixed IR (based on risk calculation, time and added value by work on financial services) first under Henry VIII in the 16th century. USURY rules evolved to avoid and fight abusive (“Usurous”) practices by loan sharks. In the Arabic times of the prophet, such abusive practices were, together with gambling (“Maisar”) and speculation (indeterminancy, “Gharar”) condemned. It is sad to see that unfortunate Western initiatives have resulted in “reactionarism” that make a debate based on facts and on common social, humanist goals not possible so far.
To end an illustration. In Islamic as in other countries, economic market development is separated from charity, called “Zakat” in the holy Qu’ran (as one of the five basic obligations for Muslims). The Central Bank in a firmly Islamic country is responsible for taking a 2.5% off of each bank account holder at the end of Ramadan. The exact date is published in all the media. Central Bank officials told me that most people, Muslims, nearly empty their account before the date.
Regards, Peter
Thanks a lot, Dear Most Peter for your deeper insights on Shariah and Islamic Banking tenets as prevalent today.. any hybri model as suggested by me can be possible..?
Dear Dr.Ghosal may also please like to throw some light on this approach..
With love and regards
Prof.S.Subramanian
All said and done it cannot be ignored that priority of lenders as well as borrowers would be to run a sustainable business and not to lean on donors and doles instead look for almost forgotten but need to be spurred up is DIGNITY and that calls for self reliance and sourcing fund from the market. Hence I applaud the recent move of SKS and look for transparency both in sourcing and pricing of fund whether it is social banking or commercial. Both need to submerge at this point for common good.
Dr.S.N.Ghosal
Dear Professor, I think that in order to develop any kind of banking a discussion on religious and social underlying resentment of banking is needed. Everywhere in the world, governments are discussing when bankers are usurous, too speculative and greedy in their banking operations and with their own remuneration. Only a global debate on integrity and usury in banking (and other trades, as RIBU in Islam is also possible and condemned in non-lending activities), can bring initiate work on solutions you propose. Without such debate, political and religious leaders, dogmatic people and opportunists can always block and frustrate that work.
Governments, central banks and international finance organisations could organise such debates on national, regional and global level with the support of academics as yourself. In fact I find that regional development banks, regional political organisations have so far been reticent to organise such debate. That might be because of possible political challenges that could be caused by religious leaders.
Regards, Peter
I enjoyed reading Mr Petras v Dijk, Mr Peter,Mr Subramonium and other experts. It is true that Microfinance/credit has the potential of becoming big business and SKS may be the first to explore it.Please note SKS has become for-profit Non Banking Financial Corporation under the guidelines of RBI, it has grown up from the status of a NGO. But the point is, as Peter has rightly pointed out- what about the accountability to the social objectives for which such MFIs were formed. What is the real staus of the target groups ? Do you have any anlytical report on a global scale? We have reports but they are fragmented analysis of any country or organisation or groups. Actually, the main stream banks are diversifying their product range through NBFCs and MFIs. MFIs in Microcredit,in turn, are trying to grow into banks of future, every one is running for a share in the pie.
I feel a separate platform for the MFIs to be maintaind with the social objectives getting priority, a separate stock exchange catring to the MFIs may be brought into existance with proper disclosures and participatory management at Institution level. Participatory management aided by professional approach at every level of the Microfinance world is essential.
Regards,
Abhyuday Chowdhury
Dear Mr. Chowdury, based on my work since 1994 in Financial Sector Development in Europe,Asia and Africa, it is my view that only a national strategy for building an inclusive economy and society can also assist in Microfinance achieving its true potential. In fact, as I explained before, there must first be a clear distinction between 1. Sociopolitical Microcredit that complements the social safety net (well outside the financial sector and 2. Microfinance as a tool, technology and institution to build inclusive financial sectors, based on a market-oriented strategy.
To be successful in both definitions of MF, data on the activities need to be collected, verifiable and analysed. This reinforces the MUST of a national strategy that is monitored by a central ministerial executive that in most countries needs the constant, sustained and consistent understanding and support of the Head of State. (not that the President regularly changes his/her mind and changes rules, polices, implementation).
As you rightly mention, only anecdotical information is available to date on the impact of MF on the target groups, although it seems simple to me: just see whether more poor people in more locations in the country get more money on their accounts, consequently, they are less poor in (micro-) financial terms. So-called social or other economic performance indicators are difficult to collect and analyse, especially for a banking institution or, on the other side, a social NGO.
As concerns the process of “running for a share of the pie”; if it is the same pie, the same market, for social services on the one side and for financial services on the other, then you would have true, coherent and consistent market forces at work that, with regular verifiable performance reporting of the market players would lead to a stronger position of the consumers, in casu again the poor who hopefully, will become less poor and full citizens, market players and informed voters, as you and me. That would increase accountability of government and NGOs and thus contribute to democratisation.
Finally, I do not think that one platform for MFIs, some acting as social organisations others as bankers (with integrity committed to outreach and equitable growth) is possible. This is demonstrated by the current debate on the internet on the Transformation of MFIs (organised by CGAP).
Regards, Peter
Here is the one of the paper of Prof. M S Sriram , revealing the deep insights of SKS and few other largest MFIs.
Must read paper and it will add an interesting dimension in whole discussion .
You can download the paper : http://www.microfinancefocus.com/news/wp-content/uploads/downloads/2010/04/Commercialisation-of-Microfinance-in-India-A-Discussion-on-the-Emperor%E2%80%99s-Apparel-M-S-Sriram-.pdf
@ Mr. Petrus van Dijk
Thanks for agreeing, supporting and strengthening the argument I presented in my previous comments regarding the lower funding costs obtained by a MFI (as well as by any commercial / financial institution) through the attraction of external investors in an IPO.
For well developed, licensed (NBFI) MFI the access to the IPO market SHOULD NOT be seen as a drift from their social mission and poverty alleviation undertaking.
For a MFI an IPO is only a FINANCIAL MANAGEMENT TOOL that raises capital in the stock-market, at a lower cost as compared to commercial bank borrowings and borrowings represented by customer’s savings/deposits, (both of them bearing also cost represented by the Central Bank compulsory “reserve requirements”, cost that is added to the interest rate charged to its micro-loans).
From my own experience I should say that the financial and risk (liquidity, interest rate and foreign currency risks) management tools continues to be a “cinderella” / weak link in the administration of many MFIs all over the world.
Actually the IPO is a TOOL that simply provides SUPPORT TO THE ACHIEVEMENT OF A MFI’s SOCIAL VISION, MISSION AND STRATEGIC OBJECTIVES due to the fact that MORE MICRO-LOANS will be disbursed to MORE POOR PEOPLE with entrepreneurial drive, thus empowering them to leave the poverty plague. Furthermore, theoretically and practically, the scaling-up of a MFI’s loan busines, obtained through the utilization of an IPO (which involves a higher volume of additional capital), should also have the effect of a lower weighted average interest rate for the micro-loan portfolio (a higher volume of micro-loans could be disbursed at a lower interest rate, while RETAINING THE SAME LEVEL OF INTEREST / FEE REVENUES and NET REVENUES recorded BEFORE the respective IPO).
I think there should be a CLEAR SEPARATION between the SOCIAL MISSION of a MFI and the TOOLS / INSTRUMENTS utilized for the purpose of achieving the respective social mission. The financial / operational self-sufficiency (MORE revenues then expenses = NET REVENUES or PROFIT) of any MFI represents the FUNDAMENTAL LINK between the SOCIAL (OUTREACH) MISSION and the TOOLS utilized to support the achievement of the respective social mission and of the poverty alleviation overall purpose/strategic objective.
If the self-sufficiency factor would be ignored within this “equation”, then we would NOT have well developed, viable and performant MFIs, but only MFIs that rely exclusively on free donor funding and on the volunteer executive and operational/administrative work force (which, actually, is not possible ), with all the negative effects both on their social / outreach mission as well as on their loan portfolio quality.
I would also like to take this opportunity to express my thanks to Mr. Kumar for launching this discussion and for his comments as well as to Mr. Satchidananda , Mr. Ramakrishnan, Mr. Chowdhury, Mr. Ghosal, Mr. Sankaranarayanan, Mr. Burgess and Mr. van Dijk for their valuable thoughts. It is a real learning experience for any reader interested in the further development of the microfinance industry and in the related application of international best practices.
George Staicu
Microfinance / banking operational, financial & risk management / public finance consultant
Thank you for your kind words Mr. Staicu. But I would like to clarify that facts from the real world of poor people demonstrates three things: 1. that all poor people need safe and sound ways to help them safeguard and manage well their money; they want deposit services much more than they want loans. Since 2004 also the world’s microcredit champion GB shows that they have many more depositors and deposits than borrowers and outstanding loans. Please also identify the sound, strong and growing financial coops (there are not many unfortunately, but you find very successful cooperative banks in continental Europe whose evolution over the last two centuries could serve as examples); they also have many more depositors and (stable, longer term) deposits than they have borrowing clients and loans outstanding, 2. People who want to escape poverty by being entrepreneurial are mostly and logically not entrepreneurial by choice, by talent or by training; they are survivalists and their rate of failure and of changing their craft, products or stationing is very variable, 3.MFIs that want to become local financial intermediators, not focusing on micro-lending, with local management and local staff, have many difficulties at the moment to attract local investors with a longer term objective and less than profit-maximising objectives. Many local potential investors are still influenced by earlier statements of global donors that Microlending is a very profitable proposal with near 100% repayment rates and poor borrowers who do not mind to pay high interest rates; two very important and persistent myths that need to be broken down!
These above-mention three points need to be kept in mind in order to promote and support the future success of commercial market-oriented MFIs that want to present a strong alternative to local and foreign-owned commercial banks and that want to diversify funding sources.
Kind regards, Peter
Dear Sir,
You are right that SKS is the fastest growing microfinance institution in India and in the World. But I want to raise some problem which I found in my feild survey. In the survey of Allahabad District, I found that representative of SKS do not know about the aim of their institution e,i,. microfinance. When I asked him, what is the purpose of the your institution, they told me that they are doing business. I think , it is a profit making work.Another issue, concerning with repayment of loans. Weekly repayment is necessarywhile anything is happened. So the member of the group take another loan to another institution for repayment of the first loan. I think this type of activities leads them in to debt crisis.
And now it seems that SKS mobilised some 75 Crore or 19.9 million US$. That is below 10% of its aim. If that is correct, is there an explanation?
I also wonder how YES Bank is going to analyse credit risk in its program to secure Microloans in India. Hopefully better than the USA banking experts in the Subprime (social) housing lending business that led to the global crisis and to the bankruptcy, not only of Lehman Bro-s, but also of hundreds of smaller banks in the USA.
Cheers, Peter
Very true, I totally agree with Prof. Yunus, if the brower is taking another loan to pay back existing loan then the entire aim of mircofinance fails. This will make way for another subprime crisis.
It seems there a misconception according to which a MFI’s IPO raised capital would lead to an increase of the interest rates charged on its micro-loans offered and, implicitly, to a social mission drift. Therefore, I would like to bring the following clarifications:
Currently, even WITHOUT IPOs or equity investor funds, MFIs all over the world are charging VERY HIGH INTEREST RATES ON THEIR MICRO-LOANS, way above the ones charged by the mainstream banking for SME loans. And this unfortunately negative reality is valid even for MFIs that rely exclusively on free/donor funding as well as for MFIs that borrow funds from commercial banks or microfinance funds at reasonable but competitive market rates.
Although it is a very interesting and long-debated/debating issue, this is not the place to discuss in detail about the REALISTIC / NORMAL MICRO-LOAN PRICING STRATEGY that SHOULD be used by MFIs in order to be CONSISTENT TO THE SOCIAL MISSION for which they have been established by its donors/owners. But what NEED to be EMPHASIZED in this respect is that, through A SOUND AND COMPREHENSIVE CORPORATE GOVERNANCE POLICY, actually implemented by the related BOARD members, the respective DONORS DO HAVE ALSO THE ULTIMATE RESPONSIBILITY in relation to THE LEVEL OF INTEREST RATES charged for the micro-loans, in order to get the assurance that a MFI is not drifting from its social mission. Among other important strategic and monitoring tasks, the respective Board is also the ultimate committee in charge with the responsibility of monitoring and approving the interest rate levels for a MFI’s micro-loans.
The consulting experience shows there are too many cases where the MFI Board, due to the fact that its meetings are rather infrequent and rather rare (especially because the board members are residents in far away countries) it delegates this responsibility to the executive management (CEO, CFO, COO) , thus forfeiting its own responsibility to monitor and approve the micro-loan interest rates. In fact, the micro-loans interest rate level setting is one of the major responsibility of a MFI Board. From this perspective the Board member should base their decision on information regarding the cost of funds (donor, bank borrowings, bonds, etc.), cost of capital (equity from investment funds or from IPOs), administrative and staff costs, the credit risk cost, etc and the minimum – maximum profit margin necessary to achieve BOTH its strategic objectives related to operational / financial sustainability (RoA, RoE) and its social mission (poverty alleviation / self-empowerment of the poor).
A MFI Board (whose members, I repeat, are appointed by its donors/owners – i.e. mostly international NGOs involved in the poverty eradication process) has a similar responsibility when deciding the level of the shareholders returns/dividends associated to an IPO , making thus sure that the respective raised capital WILL NOT generate a negative chain reaction leading to an increase of the micro-loans interest rates.
Another important issue that is directly related to the micro-loans interest rate level is represented by the executive management skills in the area of asset & liability management (capital management, liquidity management, interest rate risk management, net interest margin management, etc.) . These skills are of utmost importance for a sound and successful financial and risk management of a MFI.
Otherwise in today’s world capital markets, especially considering the current international financial crisis, there are no more high yields/returns investments unless the investors are willing to take high risks also. Most investors are seeking relatively risk safe opportunities that offer returns/yields above the interest rate offered by bank deposits, T Bills, etc. From this perspective equity investments in MFIs SHOULD NOT have associated high risks and therefore NO high returns. We should not forget that the launching of an IPO must be authorized by National Securities Commission in every country and in order to be eligible for a such instrument a company/MFI should have BOTH a long history of good and constant financial performance as well as good, reliable and comprehensive internal control systems (policies, procedures, accounting/loan/deposit tracking software, risk management systems, internal audit, etc.).
All of the above should lead to a reasonable IPO return/dividend offered to the investors through the IPO’s flyer, and consequently, should not lead to a further increase of the micro-loans interest rates . In fact, as I explained in one of my previous comments, due to the economies of scale effect, the IPO raised capital may lead to a decrease or, at least, to a status-quo of the respective micro-loans interest rates [MORE LOANS (to MORE CUSTOMERS) with a SIMILAR/LOWER INTEREST RATES will MAINTAIN THE SAME LEVEL OF NET PROFIT/RESULTS as before the IPO) ENSURING THUS AN ADDITIONAL LEVER FOR ACHIEVING THE MFI’S POVERTY ALLEVIATION SOCIAL MISSION.
George Staicu
Microfinance / banking operational, financial & risk management / public finance consultant
In the Indian context, a banker will have the following preferences, in general, while lending his money:
i. Between an individual and a proprietorship firm, he will prefer the proprietorship firm;
ii. Between a proprietorship firm and a partnership firm, he will prefer the partnership firm;
iii. Between a partnership firm and a private limited company, he will prefer the private limited company, and
iv. Between a private limited company and a public limited company, he will prefer the public limited company
In that respect, the move of SKS to go public is logical and will be preferred by the banking sector and also other funders. It would also help SKS to raise resources through commercial operations instead of circumventing the system as has been pointed out by Sriram in his paper (Refer http://www.microfinancefocus.com/news/wp-content/uploads/downloads/2010/04/Commercialisation-of-Microfinance-in-India-A-Discussion-on-the-Emperor%E2%80%99s-Apparel-M-S-Sriram-.pdf)
By and large, all banks in India are financing micro-finance sector both through direct financing (Self-Help Group linkage model) and indirect financing of MFIs, Securitisation etc. They are all public limited companies with their shares quoted in the national stock exchanges. By their participation, they are demonstrating that they are providing what is called “Social Banking with Profits” as none of these banks have reported loss in doing MF business. So, the action of SKS going public, per-se, should not be construed as an act of Mission drift.
But, after reading Sriram’s paper referred above, the concern is how meteoric in the rise of financial wealth of the promoters of MFIs such as Share, SKS and others (Mr Vikram Akula, the promoter of SKS who did not have any stake in the erstwhile NGO-MFI reportedly could rake in more than Rs.50 crore in just under a year. Similarly, Share Microfin, through multiple institutional arrangements and controlling interest in Share and Asmita could increase the personal wealth of the promoter and his families by astronomical proportion). These allegations, in fact, need a thorough investigation by the concerned authorities and the Government at the Centre as it involved the issue of dealing with poor.
Earlier, Richard Rosenberg in CGAP Microfinance Blog of 16 March 2010, had raised the issue of ‘How to tell Good MFIs from Bad MFIs’? I reproduce my comments offered then which I feel valid for this discussion also.
A simple three step test is enough to show the real colour of an MFI-
Stept-1: Before the micro-finance programme, look at the assets/ wealth of the promotors of an MFI and their clients.
Step-2: After a reasonable period after introduction of the micro-finance programme, repeat the exercise.
Step-3(a): If the assets/ wealth of promotors of MFI have grown more than that of its clients- then it is wrong (may be loot also) and needs correction at MFI level.
Step-3(b): If the assets/ wealth of promotors of MFI and that of its clients have moved up in the same proportion, then it is the most ideal situation and it should be allowed to continue.
Step-3(c): If the assets / wealth of promotors of MFI have gone lower than that of its clients, then, it needs serious correction at MFI level either by increasing its interest rates/ reducing its cost of operations.
I seem to agree with Prof. on this issue. He did not condemn the IPO totally, but said we should be carefull we do not ever-emphasis profit motives at the expense of the poor, considering the high cost of credit of some of the MFIs. there is the need to balance the two, social and business, because sustainability is one key ingredient for clients loyalty and commitment to pay. Some investors would only go for the IPO because of the profit and will put a lot of pressure on the MFI to deliver in terms monetary objective.
the IPO was primarily dictated by the venture capitalist investors who wanted an exit and secondly to access cheaper funds. the accounts of sks put up on the net do not reveal to what extent rescheduling of loans of clients is taking place. nor do they say what the effective interest rates are for the loanees. so far i have not seen any loanees of micro-finance institutions climb out of poverty. primarily because the interest rates are too high. there is no harm in going for an IPO as such as long as the funds are used to cheapen the cost of the loans to the loanees. neither is there a problem in making profits out of loaning to the poor if the latter too benefit from the process. however, what is in effect happening is that mfis are replacing the traditional moneylender and squeezing his profits while continuing to keep the poor in poverty. there should be a transparent social audit of mfi operations which clearly bring out the amount of loan rescheduling that is going on, the effective interest rates and the number of loanees who have actually risen out of poverty. at least if nothing else the IPO will finally result in full access to the account books of sks. i for one would definitely like to study in detail their account books to find out what exactly is happening.