Commercialization of Microfinance

The topic of commercialization has been hotly debated, largely because it raises fundamental questions about whether the dual social and financial missions of microfinance can coexist. It has become clear in recent years that not only can these two priorities coexist, but when done right, they are mutually reinforcing, creating a healthier long-term business model for both clients and investors.

This is not to say it is easy. Many MFIs Grameen Foundation partners with – particularly those that are for-profit entities with strong social missions – work hard at maintaining a strong focus on both social and financial goals. What is interesting, however, is that that some publicly-traded U.S. companies appear more committed to and more convinced of the need for mission-focused business than many in microfinance, an industry that has received billions of dollars of subsidized funds over the decades. Why is it — after years of talking just of scale and not of clients, of crises from India to Morocco, of governments stepping in because the industry has failed to self-regulate – that there still debate around whether social and financial goals are mutually reinforcing?

Take the U.S. company Whole Foods, with a market capitalization of US$12 billion. In a recent presentation to the Asian Institute of Management in Manila, Whole Foods director Dr. Ralph Sorenson, discussed the company’s “conscious capitalism” model, in which businesses are “primarily driven by their mission and their sense of purpose.” This requires optimizing returns for all stakeholders, with customers as the most important stakeholder, and leads to an ultimate vision that “in the long run, it is better to be mission-driven than profit-driven…profits [are] an end result, not a goal in and of themselves.”

Surprisingly, few MFIs are offering such compelling overarching visions of microfinance as a truly double bottom line business. Nevertheless, an increasing number – with the support of their industry partners and investors – are incorporating similar approaches into their business by (a) maintaining a strong focus on improving clients’ lives by, among other things, offering diverse products and services and measuring how those products work through social performance tools; (b) including poverty-fighting principles in their incorporating documents; and (c) managing the allocation of profits such that clients benefit through improved products and services, lower rates, or complementary services such as health or education.

PT Ruma, a microfranchise-based social enterprise Grameen Foundation helped found in Indonesia, is an example of a business that has built social goals into its incorporating documents. Ruma’s articles of association require that its social goals be met before shareholders receive any financial dividend payouts. This innovative approach ensures that the social bottom line does not get shorter shrift in a “commercialized” entity and has supported, rather than hindered, Ruma’s ability to raise investment capital.

Capital raising presents another challenge for many MFIs, since the way an institution funds itself can drive very different behaviors, priorities, and business models. For example, commercial lenders do not typically seek to influence a borrower’s direction and strategy; most often they simply want to be repaid on time at a pre-determined rate of interest. Strategic equity investors, on the other hand, often expect to have a seat at the table advising on the direction of the institution and, as such, have the potential to alter the behavior of management or the strategic priorities of the institution. If investors’ goals are focused on their own short-term financial returns, it may drive decisions that conflict with an institution’s ability to meet its social goals – in other words, to put clients first.

Grameen Koota (GK), a long-time Grameen Foundation partner in India with a deep social mission, has grappled with this balance. GK’s ability to scale has been largely funded over the years by local commercial banks, an effort we have supported through our Growth Guarantee program. However, when it comes to securing strategic equity investors, GK expressed concern that taking on more commercially-minded equity investors might force it to place profits ahead of mission, for example, by pushing it away from the more difficult-to-reach clients who cost more to serve. GK has managed this by securing a balanced mix of both social and commercial investors, and in doing so, being extremely clear about its plans (target segment, mission, how their business will evolve), so that investors know upfront what they are “buying” and do not expect GK to shift course after their investment. This balanced approach has allowed GK to continue to focus on achieving robust social and financial results.

Grameen Bank, of course, offers one of the earliest and longest-standing visions for microfinance as a business that puts mission first and views profits as a means, not an end – and is a strong example of a local, deposit-driven model. As the microfinance industry grapples with the very real challenges of how to shift from years of over-focus on institutional growth at the expense of clients to a deeper understanding of what clients need and want, there are lessons to be taken from the private sector, where at least among certain segments, it has long been understood that a successful business approach requires that your clients thrive.

There is room for a variety of approaches to commercialization across the microfinance industry, and how an organization engages with this trend will depend on its own mission and objectives. At Grameen Foundation, we believe in prioritizing the mission and purpose and with profits acting in service of that mission, and that overall, this approach is a win-win scenario, creating stronger institutions that put the benefit of their clients front and center thus ensuring these institutions generate healthy social and financial returns over the long term.