6 Questions for SKS

A rare microfinance occurrence took place in late July this year. The Indian microfinance institution, SKS, became the second pure MFI globally to go public by listing its shares on the stock market. SKS is one of the largest microfinance institutions in the world with almost 6 million clients, mostly poor women living in rural areas. It has also been one of the fastest growing MFIs over the past few years, with a compound annual growth rate of 165% since 2004.

From one perspective, the IPO was a great success. It was 13 times oversubscribed, the company valuation reached the top of the offer band price (valuing the company at $1.5 billion), and the share price rose 42% in the first five weeks of trading. In the process SKS raised $155 million in fresh capital that will allow it to grow and serve far more people than it reaches now.

But for most of us, including those closely associated with SKS, evidence of real success will only come when we know if many more poor people have benefited. The purpose of the IPO was not just to access capital markets, but to access them to serve the interests of poor people.

The SKS IPO story is told in a CGAP paper published this week. The paper shares facts and asks questions about SKS and the IPO to stimulate discussion of this landmark event for microfinance.

For six weeks starting today, CGAP will host a special series on this blog representing the views of global microfinance leaders on the IPO. The series will reflect a diverse cross-section of views on the implications of the IPO and its influence on future direction of the microfinance sector.

It is clear that we have a long way to go from the estimated 100-150 million people accessing microfinance services today to reach the almost 3 billion un-banked people. Scaling up outreach to many more poor and un-banked people is the main goal for most of the microfinance world. Microfinance growth has often been and is still funded by governments, international donors, and socially minded investors. In addition, an increasing number of MFIs are able to mobilize deposits (though not in India) and borrow from commercial banks.

However, MFIs still say that one of the biggest constraints to growth is not having enough funding. What the SKS IPO shows is that MFIs can indeed harness the vast resources of capital markets. The initial success of the IPO raises the stakes for SKS. Some will celebrate this milestone event as opening up new avenues and opportunities for microfinance while others will be skeptical that the goals of profit seeking capital market investors can be compatible with the interests of poor rural women.

The CGAP paper describes SKS’s track record of establishing and trying to sustain a significant ownership share in SKS for the borrowers. This was done through the creation of shareholding mutual benefits trusts (MBTs) whose shares were valued at $220 million at the time of the IPO and are worth even more with the subsequent rise in the share price. The MBTs sold some of their shares after the IPO, realizing $42 million that will go back to the original SKS Society. The Society intends to build up a network of high quality schools to serve the children of SKS clients and other poor people.

But SKS will be watched closely for more than that.

• Will SKS continue to focus on growth that reaches poor people who are not being served by others?
• Will clients be better served by an expanding the range of services, higher quality services, and more affordable services?
• Will the clients retain a strong voice in the affairs of the company to help it sustain a direction that serves their interests first and best?
• Will shareholders understand that doing what is best for the customer is fundamental to sustaining long term shareholder value?
• Will SKS’ social and financial performance help influence policies in India and globally in favor of greater financial access for more poor people?
• And ultimately, will the lives of the many poor people SKS serves change for the better?

The SKS story still has a long way to go. What it does next will be closely watched by supporters and critics alike but it now has the opportunity and obligation to show the world that the poor can access capital markets to their advantage.