Controversy over commercialisation of microfinance organisations

The rift between microfinance institutions (MFIs) who’ve decisively turned to commercialisation and those who believe that MFIs must retain their altruistic spirit by remaining non-profit organizations has further widened during the last few weeks, when it was revealed that SKS Microfinance, India’s largest MFI, which serves about 5.5 million clients intends to raise $250 million in an initial public offering (IPO). This means that they will be offering shares in the MFI to be bought by the public for the first time, and they will therefore become accountable to their shareholders for delivering a return upon their investment – effectively meaning that they will be required to make a profit.

This development comes in the wake of the announcement by Compartamos – a Mexican microfinance bank founded in 1990 which is one of the few MFIs that have already made the leap and gone public – of its intentions to take microfinance institutions in other Latin American countries such as Colombia, Peru or Brazil. Such acquisitions would allow Compartamos to grow faster since for instance Brazil’s GDP is forecast to grow 5 % in 2010, while Mexico’s outlook stands below 3%.

This trend constitutes a major source of concern for the supporters of the original mission of microfinance. Their emblematic figure, Mohammed Yunus, Nobel Peace Prize and founder of Grameen Bank, shared his views on the issue in an interview with Microfinance Focus on the sidelines of the Regional Microcredit Summit earlier this month, and stated that many organisations were taking microfinance “as an opportunity to make money for themselves rather than worrying about what happens to the poor people so that goes into the same mentality as the loan sharks”. He lamented the fact that although the original founders had created microfinance in order to fight loan sharks, “in the process some of these organizations are becoming loan sharks themselves”, citing Compartamos as the ultimate example.

Supporters of commercialisation within the microfinance industry often claim that it is necessary in order to reach many of the billions of people without access to financial services. Because non-profit-making MFIs often rely on donated funds to support their operations, there are limits on how much outreach they can do.

However, there are some who question this view. Yunus’s comrade-in-arms and another historic figure, the founder of RESULTS and CEO of Microcredit Summit Sam Daley-Harris, also spoke up in an interview with Microfinance Focus published on Tuesday, raising concerns over the real intentions behind IPOs: “Did Grameen Bank raise money from the market? [Grameen is one of the largest MFIs in existence and in 2007 had over 7.41 million members] How much of the Compartamos IPOs went to fund the loan portfolio? Zero. How much of the SKS IPO will be going into the loan portfolio? It seems like it’s a lie.”

Mr Daley-Harris was keen to point out that he is not against MFIs raising funds from investors in principle, commenting: “If MFIs stick to the mission, they can engage with investors or other stakeholders in a right direction of poverty alleviation programme.”  As an example he explained “There was a deal, 3 years ago, of $180 million with BRAC and Citibank – I don’t think BRAC’s mission changed, I think they just had the resources they needed to expand their mission.”

Commercialisation of microfinance is an undoubtedly controversial topic. Muhammad Yunus and Sam Daley-Harris are sounding warning notes against ‘mission-drift’, against letting the growth of an organisation erode its mission to tackle poverty. In his interview Sam Daley-Harris ended on a rather sad note: “if we go too far down that road there’ll be a day where you, and I and others will be ashamed that we’re in microfinance.”


8 responses to “Controversy over commercialisation of microfinance organisations

  1. Daneshwari

    Microfinance in India, it seems supports itself, on public fundings such as donations and shares, coming from middle class. What about those illiterates with per capita $1 a day to live on? Do they understand what it is all about?

  2. Microfinance is now like a small ball of play dough that bears the brunt of hidden agendas and weak justifications that accompany these agendas, when made public. Unlike a lot of other industrial sectors, in microfinance, the means do not justify the ends, so if MFIs claim their main aim is to help the poor, but that it cannot be done at low interest rates, then we cannot accept them.

  3. It sounds that I am opposed to commecialization. I am not. I am against “profit maximation”, making as much profit as possible off the poor. Here are my remarks from the April 14, 2010 launch of the Spanish National Host Committee for the next global Summit:

    Here is how I have changed as a result of the Summit last week in Kenya. I now see that the spiritual dimension of microfinance, the redemptive dimension of microfinance is central to my vision for the field. The technical issues surrounding microfinance are important, but only if they serve the transformational dimension.

    When Prof. Yunus lent a grand total of US$27 to 42 desperately poor Bangladeshis in 1976, it turned out to be much more than just an economic transaction. One of the 42 borrowers was Sufia Khatum, a stool maker who struggled to survive on 2 cents a day. That was all that was left after she borrowed money from the money-lender to buy the bamboo to make her stools and then sold the finished product back to the money-lend at a price he set. The price he set barely covered the cost of the bamboo. Her profit each day—just two cents. As Prof. Yunus has said, he was ashamed to live in a country where people could work so hard and only make 2 cents a day. But with her loan of less that US$1 from Prof. Yunus, Sufia Khatum was able to pay off the money lender, buy her raw materials, make her stools, and then sell the stools to the highest bidder. Her profit soared 60 fold, from 2 cents a day to $1.25 a day.

    Prof. Yunus talks about how surprised he was that such a small amount of money could make 42 desperately poor people so very happy. It freed them from the money-lender. It freed them from debt bondage. And I would add it unleashed the human spirit. It is not only a story of economic transformation but of spiritual transformation. This is the story we must tell and must contrast with those going down the profit maximizing fork in the road

    Prof. Yunus also says the very poor are like bonsai trees. They have every quality they need to blossom and grow into a huge tree, but the conditions they are grown in keep them small, just as the conditions of poverty keep the poor small and don’t allow them to reach their full potential. Prof. Yunus says that a loan of $50 to a poor woman allows her to discover who she is at $50. The next loan of $100 allows her to see what her potential is at $100, and so on. That is unleashing the human spirit—the spiritual side of microfinance. Let me read this excerpt from my closing ceremony speech at the Summit in Kenya.

    [Quote] When the Summit opened, I spoke about the gang member known as “the general” whose life had been transformed by microfinance. I said that there are many vision for microfinance including this one: microfinance for redemption. The dictionary defines redemption as restoring one’s honor and worth, setting one free.

    It was at the Summit in Kenya that I realized that there might be many visions for microfinance, but my vision for the field is microfinance for redemption. On the first day of the Summit Ingrid Munro of Jamii Bora introduced us to Wilson Maina who was one of the most wanted criminals in Mathare Valley slum in Nairobi. Wilson said he would rather die quickly from a policeman’s bullet than die a slow, death from hunger. That was why he had turned to crime.

    But a member of Jamii Bora’s staff saw a better life for Wilson and helped him see a better life for himself. Over a one year period Wilson saved $10, none of it from stealing, and then received a $20 loan. Wilson now has four businesses and has convinced hundreds of youth to get out of crime. How is that for a return on investment? He has convinced hundreds of youth to get out of crime. It might not be the return on investment some investors want, but it is the return on investment that communities need and the return on investment that the world needs.

    The world’s poor need this kind of redemption—redemption that restores their honor and worth and sets them free. Redemption that Prof. Yunus saw with the $27 he lent to 42 people 34 years ago—redemption he has seen over and over again for more than three decades.

    And here is another kind of transformation the world needs—that we look at people whom we had previously seen as the problem instead as the solution. The world needs us to change our own thinking rather than writing people off as incapable of transforming their own lives. [End quote]

    I hope that like me, the Summit in Valladolid will bring profound changes in thinking and action for the delegates. We are delighted to work with the National Host Committee that is being introduced today. We are grateful for their partnership and for the contribution they will make to a successful Summit, a Summit that brings us closer to the end of poverty and to the unleashing of the human spirit. Muchas gracias.

  4. I enjoyed reading your response, Mr. Harris. The only problem is this – it’s not possible to measure the redemptive nature of microfinance. How can one achieve what cannot be measured?

    Smile Foundation launches its phase-II programme of ‘Smile on wheels’. It is a mobile hospital facility that provides health-care services to the poor people living in rural and urban villages of Delhi and Chennai,. who can’t avail medical facilities.

    I am sure we could measure the number of smiles on the people helped by us to overcome poverty and ill-health.

    How about the stock holders of the MFIs accepting the number of smiles per share as reward? I am sure many charity minded persons would be happy to see “God in the face of the smiling poor.”

  6. Pingback: License to Bank « Kaushal

  7. I have read these comments with much interest.

    I do believe that in the UK at least we have a template for a “third way” which balances the need to attract capital with the obligation to put social benefit first: its called an “Industrial and Provident Society For The Benefit Of The Community”

    This is a cooperative enterprise ( one member one vote) which must use any PROFIT for the benefit of the community identified in its own rules which are subject to approval by the FSA. In addition shares cannot be sold/transferred – they can only be redeemed to the society itself at face value or less. So there is no prospect of either a dividend or a capital gain.
    (This also safeguards the original social purpose of the society).

    The only means of providing a financial return for investors is that the society is allowed to offer INTEREST to shareholders subject to certain limits: It cannot be more than is needed to attract and retain sufficient capital to allow teh society to conduct its business profitably (for the benefit of its community). There is also a legal limit of 10% per annum.

    I have used this legislation to establish “The Cochabamba Project Ltd” which has raised well over over $1m which has provided finance for over 1000 subsistence farmers in Bolivia. The society pools the funds of ordinary “middle class westerners” and acts as a partner in the commercial forestry enterprise. The society will reward its shareholders with interest payments of 6 – 7.5% but any surplus profit will be used either to expand the remit of the operation or to invest in other assets needed by the communities. (The ability to accrue interest for investors is vital in our case because our trees will take years to produce any revenue – so waiting that long would be very unattractive to investors)

    This rate of interest is certainly not charity – but the investment risk is very high and certainly is not remotely reflected in the rate of interest awarded, when compared to pure private equity.

    I believe that The Cochabamba Project has shown that the IPS model could be adapted very successfully to Microfinance and would be keen to work with others to test this out.

    If anyone is interested in joining me please get in touch.

  8. Pingback: Microfinance in the spotlight: can it exacerbate poverty? | RESULTS UK – The Power to End Poverty

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