From technologists to Hollywood starlets, it seems everyone is coming to the microfinance table, including investors. Last month, Mexico’s Compartamos, a microfinance bank, completed a $400 million IPO. In India, SKS Microfinance raised $6 million from US venture capital firm Sequoia Capital, Dubai-based Legatum acquired majority ownership of SHARE Microfin for $25 million, and Uttar Pradesh-based Sonata acquired Madhya Pradesh’s Jeevika in India’s first real microfinance merger.
What began as a social movement is becoming a market opportunity. However, this increasingly large set of participants has a wide spectrum of agendas, which is leading to a mismatch of expectations. As the industry pioneered by Nobel Prize winner Muhammad Yunus and his Grameen Bank gains prominence, it is also undergoing fundamental changes that are prompting questions from industry veterans.
‘Will microfinance organizations really continue to serve the poor if private investors get involved?’
‘Will the non-finance development work that many microfinance organizations engage in continue?’
And ultimately, ‘Is access to the capital markets indeed in the best interests of microfinance clients?’
These questions merit debate and will take time to resolve. Microfinance is undergoing a sea change, and it’s up to the captains of our industry to chart a course consistent with their inspirations for entering this field. As those in the sector, new and old, sit down to discuss this, here are a few underlying principles that might guide the conversation.
Microfinance is a legitimate business. Microfinance organizations, even for-profit ones, provide a service that is not otherwise available to their clients. Successful microfinance organizations provide doorstep loans at a price point and quality level which neither banks nor informal lenders can match.
Their business model is efficiency, flexibility and customer service. Where microfinance has been successful, it has often put dents in the businesses of local moneylenders who may charge rates two and three times as high, are not bound by codes of conduct, and do not pay taxes. Like any sustainable business, microfinance must both meet customer needs and generate profits.
Microfinance operates in a special sector of the economy. Its clients are often some of the most economically vulnerable members of society. Any business whose target market constitutes this “bottom of the pyramid” must be particularly vigilant about its conduct with, and its long-term effect on, these customers. The world’s larger microfinance organizations, some of whom can touch a million or more people each week, must realize the positive and negative impact that their policies and actions can trigger.
There needs to be a sorting out between for-profit and non-profit players. Microfinance is not a monolith. There are thousands of these organizations around the world, with hundreds of different missions and models. Many are community-based and most are structured as NGOs, non-profits, societies, co-ops and trusts. There are also for-profit companies, some of which have downscaled into this market, and others that have transformed from NGOs to lending companies. It’s time for a “sorting out” of the for-profits from the non-profits, understanding that there is room for both, and roles for each. Many microfinance institutions should (and will) remain development-focused, measuring their success by broad social objectives rather than profits or returns. Some will try to do both—a few may succeed. But the introduction of private and public equity into this sector means there will be players who focus on sales volume, operating costs, risk diversification and returns. There is a place for these organizations; in India, that place is out in the public light, under the direction of independent boards, transparent investors, and responsible executives, and, within the purview of the Reserve Bank of India, not under the thumb of local politicians or public administrators.
The people in charge matter, perhaps more than in other businesses. The boards and managers of large microfinance organizations must recognize the power they have and the responsibility they carry to ensure that the clients and employees of their organizations are not misused or abused in an effort to generate short-term profits at the expense of creating long-term value. This industry truly requires a “stakeholder,” not just “shareholder,” perspective from its leadership.
We are seeing the beginning of the commercialization of microfinance. About 10 years from today, we may be able to look back and see that we were successful in establishing a model demonstrating how for-profit companies can serve poor clients in a sustainable manner, or we may cringe and rue the day our industry swallowed its moral standing.
Mark David Straub is an analyst at Lok Capital in New Delhi. He blogs at www.bankerinindia.typepad.com. Comment at firstname.lastname@example.org