SKS Microfinance Ltd., India’s largest microfinance institution, has released an IPO. But can pro-poor banking also satiate share holders?
On July 28, 2010, SKS Microfinance Ltd., India’s largest microfinance institution, went public. With stock options of around $350 million, SKS is one of the biggest of the small group of institutions in the field that have issued an IPO.
The question is whether a publicly traded company, whose obligation is to make money for its shareholders, can genuinely prioritize the needs and interests of the poor.
Microfinance – the system of banking services specially tailored to the poor – has been heralded as the new frontier of poverty alleviation. Where macro solutions like government aid and foreign direct investment are vulnerable to corruption or come with strings attached, microfinance puts capital directly into the hands of people who need it.
Microfinance institutions grant loans between $20 and $200 to help propel small money-making activities like sewing, animal rearing, or carpentry. No collateral is required, loan officers come to the field, eliminating travel time, and interest is paid in small, affordable increments. Because it helps launch money making activities, microfinance is a more sustainable and reliable version of charity.
More than 1oo million people around the world are currently clients of microfinance institutions, 99 per cent of which are not for profit.
Profit vs. Non-Profit
The earliest microfinance banks were created to compete with village money lenders who, for millennia, have been charging astronomical interest rates in a totally unregulated environment. Critics of SKS’s IPO move claim that it will steer microfinance back towards this sort of model, where rich people capitalize on the poverty of others.
Among these critics is Muhammad Yunus, the man credited for sparking the microcredit revolution through his work with the Grameen Bank in Bangladesh, for which he received the Nobel Peace Prize in 2006. He recently told the Associated Press, ”By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me.” For Yunus, SKS is not causing friction within the microfinance community; it is undermining the raison d’etre of pro-poor banking.
But for Vikram Akula, the Founder and Chairman of SKS, commercial funding is necessary to scale up microfinance initiatives. His goal is to reach 100 per cent of India’s poor. Behind his desk in his Hyderabad office, a map shows the degree of financial penetration across the country. On it you can see large areas that are still untouched, for example the harder to reach and sometimes politically unstable North East.
“The only place you can get the amount of money that is needed to help the poor is in the capital markets,” Akula recently told the Wall Street Journal. “That’s why we are doing this IPO.”
Akula began his company as an NGO in 1998, but he felt constrained by the not-for-profit business model. In 2003 SKS Microfinance Private Limited was created, which became a Non-Banking Financial Company (NBFC) in 2005. Since then it has grown from 500,000 clients to close to seven million, with a current portfolio totally over $1 billion. Its 21,154 employees serve 90,000 villages.
Employees are paid at rates comparable to commercial bank jobs and have good benefits. This allows SKS to recruit from rural business schools. Bringing the microfinance climate closer to the conventional financial world is part of his business strategy.
To maintain its level of growth and to pay its employees as well as it does, SKS charges around 28 per cent annual interest on a loan. This is in contrast to the 18.5 per cent that Grameen charges, but is still far less than the 36-72 per cent that village money lenders charge.
Yunus has been publicly critical of what he sees as unnecessarily inflated interest rates in order to increase profits. But Akula says it is necessary to cover the costs of reaching hard to access communities, a problem not faced by Bangladesh, with its dense population. Plus, he adds, despite the extra 10 per cent, borrowers are still able to make returns of between 30 and 250 per cent on their businesses.
IPO was the natural evolution
SKS’s move into capital markets was largely inevitable. After a certain size, the amount of capital a microfinance institution needs to sustain growth exceeds what private equity investors and banks are able to provide. Furthermore, engaging with capital markets reflects Akula’s vision of moving the microfinance sector further away from the charity sector and closer to mainstream finance. Getting IPO approval is a significant victory in this pursuit.
Certainly there are trade-offs in befriending Wall Street, including higher interest rates, but if this is the price of having access to millions of dollars that can be loaned out to the world’s poor, and if clients are still able to profit through the benefit of the loan, than isn’t this a win-win situation?
The debate is reminiscent of the early disputes on economic globalization. On the one side were anti-capitalist activists worried that the rights and needs of the poor would be exploited by the intrusion of heavy handed multinational companies. On the other side were those who said that engaging poor countries in global trade and industrial systems was a necessary step in levelling the playing field and closing the gap between rich and poor countries.
The solution to this problem was not, for example, to stop multinational clothing companies from outsourcing labour to Turkey and Bangladesh – which were huge injections of capital into these economies and created desperately needed sources of employment – but rather was to ensure appropriate regulations were in place to make the process ethical, including enforced minimum wages, appropriate labour standards, and legally binding contracts between the host country and the visiting company. This did not always occur, of course, and many countries and workers suffered from the activities of multinational companies. But the countries with the best regulations have had the most benefit from economic globalization.
A similar rationale can be applied here. The interests of share holders must be regulated. If there was a cap on share holder profits, fixed at, say, 10 per cent, the incentive for investors would be retained, but not at the expense of the client’s well-being. Ceilings could also be placed on interests rates. Shareholders, after all, benefit from positive public relations feedback, something JP Morgan, Morgan Stanley, and Goldman Sachs, three of the primary investors, could probably use. To be perceived as a socially responsible investor is a kind of profit in itself. SKS would remain the majority shareholder and so retain control of the company.
If regulations like these don’t happen and the majority of profits are not channelled back into the loan portfolio, as critics predict, the microfinance community will likely experience a more defined schism. If there is money to be made, there will certainly be interested investors which means going public could become the dominant trajectory of large-sized microfinance organizations.
Then the issue would be how to communicate the options to future borrowers who receive a knock on their door and an offer of a thing called a bank account without any reference point for making the decision.