Microfinance – Profiteering, Bubbles and Poverty Alleviation

David Roodman, of the Center for Global Development, has written a post offering his thoughts on the microfinance ownership/business model debate between Muhammud Yunus, founder of the famed Bangladesh based Grameen Bank, and Vikram Akula founder of India based SKS Microfinance, which took place at the New York based Clinton Global Initiative Conference last month. 

The gist of the Yunus-Akula disagreement is that Yunus is critical of SKS’s business model.  He described its IPO as “Pushing microfinance in the loansharking direction. It’s not mission drift. It’s endangering the whole mission.”

Akula advocates that the best way to scale up operations is by going to the money markets. Yunus says that in doing so, one is giving ownership of the institution to people other than the customers, hence raising the possibility that the owners will not act in the best interests of this group.  

He says that Grameen, unlike SKS, is owned by its borrowers, and hence profit goes back to them. It is comprised of local savings – something Akula points out that SKS cannot do because the Indian government does not allow it.

So it seems that, given India’s legal framework, SKS’s model is the only viable way to scale operations. 

Additionally, while Yunus implies that ownership external to the borrower community could lead to a desire to maximize profit, the MFI community is thriving, and as Roodman points out healthy competition virtually obliterates this possibility. 

Sachin Chiramel, a program manager at Ujjivan Financial services, disagrees with Yunus’s claim that taking a microfinance company public is pushing it “in the loansharking direction.”

“That’s the opposite of the truth as evidenced by the fact that MFI interest rates have been continuously coming down as would be expected as competition for customers increases. And there have been no instances of MFIs (except for spurious ones which are disguised loan sharks) manhandling defaulting customers -- they still use other unconventional methods,” says Chiramel.

He goes on to say: “Yunus's point of maximising profit isn’t really an issue because the only real way to maximise profit in this industry is volume: lend to as many customers as possible and lend as much as possible. Which, one can argue, is exactly what the poor need and which is exactly what Grameen's goal is too.”

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There are of course larger questions than ownership, and both Roodman and Chiramel raise these. For one thing, microfinance could be creating a bubble by encouraging borrowers to take out a string of loans that they later will have to default on. The WSJ wrote a good piece on this last year. 

There’s also the fundamental issue of the utility of microfinance as a poverty reducing mechanism. Microfinance loans, while in theory are used to finance income generating activities, in fact are often used to fulfil more basic day to day needs involving food, clothing and health. 

“Microcredit significantly lowers expenses by lowering interest rates - a brilliant thing. But not something that’s going to bring the poor out of poverty in 5 years, which is the mission of most MFIs. Without significant investment in capacity building i.e. vocational training, business consultancy for the poor etc, we're not heading out of poverty anytime soon,” says Chiramel.