Is SKS Any Different from Wal-Mart?
This is the first time that I have knowingly contributed to a ‘blog’; hence I am not familiar with medium’s etiquette. Am I to oppose, to concur, or to add? I’ll try to do all three.
Steve Rasmussen poses a number of important questions; they are mostly about the future, and about clients, which is surely where our focus should be.
I shall not comment on the rights or wrongs, legal or ethical, of the ways in which the shareholdings of the SKS clients’ Mutual Benefit Trusts were handled; Professor Sriram has already covered that issue, very well.
I shall start by making some general assertions which I believe to be true, or perhaps at least to be provoking, which may be more useful than being true.
First, the impact of microfinance, for good or for ill, is exaggerated. It is no more than second-rate retail banking for people who cannot afford the relatively decent services which all the readers of this ‘blog’ enjoy. Our banks serve us, more or less effectively, but they are much less important to us than our schools, our health care, our employment, our security, our communications… Let’s not fall into the trap of believing that microfinance, or the institutions which provide it, or still less the parasites which surround it, academics, commentators, consultants, researchers and so on, are so very important.
Second, the number of people who are still un-served by microfinance is also exaggerated. The figure of 150 million people omits the sixty odd million members of self-help groups in India, whose groups are served by commercial banks, the millions who have individual accounts with banks of all kinds, particularly cooperatives and credit unions, and the many more who are rather well-served by informal but often very sophisticated traditional institutions.
And every human being does not need financial services. Most households do, and there are not three billion un-banked households.
Third, the commercialisation of microfinance is a ‘done deal.’ To misuse a sentence from Abraham Lincoln, “the world will little note nor long remember what we say here.” When BASIX was started in Hyderabad our mission said we hoped to “access mainstream capital.” Now microfinance is a mainstream business, it’s been “Wal-Martised,” whether we like it or not, Compartamos and now SKS have shown the way, and soon many more will follow. The clock cannot be put back.
So, let’s look at microfinance, and SKS, through the same lens as we look at any other business. We don’t expect Wal-Mart or their peers not to rip off the poor because they want to help them. We hope that antitrust laws, other regulations, public opinion, and above all competition will stop them. Generally, albeit imperfectly, it works.
Mr. Sam Walton and his family have made vast sums of money by successfully satisfying the needs of millions of people, particularly not-so-wealthy people, and we don’t seem to grudge them their riches. If a donor had subsidised Wal-Mart’s entry into some apparently unattractive market; rather as DFID so cleverly subsidised Vodaphone’s MPESA in East Africa, and Wal-Mart had done very well out of it, as MPESA apparently has, would we complain? I think we would congratulate the donor for effective promotion of ‘market access for the poor.’
So although many people (and I include myself), find it distasteful, or may even think it stinks (are we perhaps secretly a little jealous?), when the promoters of SKS make millions out of a business whose original objective was to serve the poor, that’s capitalism.
We may prefer co-operative banks, which don’t make a lot of money for any one individual but do provide safe and accessible savings products to poor people. In spite of some notable exceptions, however, that’s not the dominant paradigm.
It’s more profitable to keep people in debt than it is to help them save.
As Peter Drucker wrote, “the purpose of business is to create and keep a customer,” MFIs certainly do that, and if we don’t like it we should maybe go back to Marx rather than nit-picking over the details.
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Comments
Dear Malcolm, ‘Age cannot
Dear Malcolm, ‘Age cannot wither nor custom stale his infinite variety’(a reuse of Shakespeare’s on Cleopatra with a small change -instead of her it is his), would aptly fit you.
Same openness and forthright observations by you which I had observed during our meets at NABARD and at the Cranfield Institute, would make some of the readers of your observations on SKS (consultants, experts in micro-finance et al) to do some retrospection, particularly when they read ‘are we secretly jealous? when promotors of SKS make millions’.
But, way back in 1990s, when BASIX was started in Hyderabad its mission as mentioned by you was “hoping to access mainstream and capital.” And you had served it as its Chairman for 10 long years. At that time, you felt that accessing mainstream and capital was not bad, but now you feel the effort of SKS is similar to Walmartising. You were also a critic of NGOs undertaking micro-finance lending work as in your opinion, they were not cut for that type of job. If NGOs are not equipped with their limited capability to run micro-finance lending programmes, ‘for profit MFIs’ are Walmartising the micro-finance lending programmes(this may include Basix also), and banks are willing to provide financial services only to people like us (sometimes those who do not need them), then where will be unreached and underserved poor will look for, for their need for various financial services?
There is no one size fit for all mechanism for addressing the issue of financial access by the poor. In that respect, SKS is also one of the evolving mechanisms. We must also recognize that ‘Social Banking with Profits’ would help in making microfinance programmes a more sustainable one. With SKS coming with the IPO, it has allowed itself for a public scrutiny which none of the for-profit MFIs in India have demonstrated so far. In that respect, SKS has taken the lead. With a large pool of experts in micro-finance available world wide, let constructive criticisms and solutions come and make SKS work better.
My Dear Malcolm,
My Dear Malcolm,
You are such a delight because you do provoke me, wherever you are! And I am delighted that you are running this week’s blog! Thanks for your time and effort!
I am answering some of your questions considering the twin aspects of commercialization and IPOs and want to make it clear that this applies to wider MF practice in India (again, not all MFIs). I think it would NOT be fair to SKS to use their name alone to discuss many of the things that you have touched upon – because they are far broader and concerning the larger industry in India. There are also some things that SKS has done well (en-route to the IPO) and I will be making a posting on that – some of these aspects are not known to many in the micro-finance world and they constitute very important lessons for the micro-finance industry. Well, that is later and here are my responses to your questions.
First, you say that “the impact of micro-finance, for good or for ill, is exaggerated”.
Agreed and in many ways, it would be unfair to expect micro-finance to do it all. My work over 2 decades in about 540 districts of India has given me one important learning: Even if you lend at 0%, returns from agriculture would most likely be negative and micro-finance skirts agriculture and most of India’s poor are engaged in agriculture. So, micro-finance cannot and should not be expected to make a serious impact on poverty in India and at best, it should seen as an empowerment mechanism – I am sure you would agree that having cash (which is the most attractive product on the face of this planet) reduces vulnerability as long as the cash is in hand. Of course, it is a different matter that when the cash (loan) is utilized, the vulnerability doubles because of low returns from the activity and the additional burden of repaying the loan. This has serious implications for the kind of predatory (sub-prime type) lending that is occurring in India. Of course, your (Drucker quote) perspective is that MFIs are well within their right to create and sustain their customers.
Second, you argue that “the number of people who are still un-served by microfinance is also exaggerated.”
All numbers are exaggerated (served and un-served) and I agree on this. You are also very right in stating that one must add up the SHG bank linkage and many informal institutions to get the correct outreach in India. Fair point and is very well taken. I have two issues with regard to outreach: First, is the fact that there are a large number of clients who are ‘double’ or ‘triple’ counted among MFIs and therefore, this would need to be factored in while talking of outreach and therefore, un-served would be surely higher than is currently presented. The same may be true in the SHG bank linkage but I have no direct knowledge of this. Second, is the aspect of ‘ghost clients’ and/or ‘non-micro-finance clients’. Please see Thorat and Arunachalam (2005) for further details. In my practical experience, I have come across between 7 to 9% ghost clients in several sampled portfolio’s and about 6 – 12% of the portfolio in non-micro-finance clients. For those who ask for evidence, there is plenty (from field worker diaries, MIS outputs to video clips/tapes, etc) and more importantly, I am happy to join a larger group that can visit MFIs (we can randomly select them) and perform a rigorous client, portfolio and Systems/MIS audit in their operational areas – it is imperative to do all three audits concurrently in one complete branch (randomly selected) supported by good samples from other branches and also cover the entire trail of money and process flow (back and forth, right upto headquarters). This alone will set the record straight with regard to ghost clients and related aspects and establish the extent of this phenomenon on a national scale.
Ghost clients are most often used to take care of delinquencies that arise due to different factors including burgeoning growth. Ghost clients also appear to exist because of a new kind of intermediary – ‘broker agents’ who have taken on the function of supplying JLGs to MFIs (often, they supply the same JLGs to many MFIs and hence, the double counting of numbers). Interestingly, these ‘broker agents’ have become an integral part of the decentralized operations that many MFIs are having in their quest for burgeoning growth, and where they work, KYC documentation is also done by them. Such KYC documentation is often seriously flawed and I have come across cases where documentation is there but people do not exist – in few cases the broker agent had used the money to lend it in the local markets at higher rates of interest. I have also come across cases where the documentation is in the name of so called micro-finance clients to satisfy the priority sector norm whereas the actual lending is to a non-micro-finance client. A banker friend, also corroborated this and told me that when he visited UP a couple of years ago, there was a case where the actual end user (a non-micro-finance client) of a loan had 1 person in 20 different JLGs, each giving him their loans regularly (for which they got a consideration). The banker friend was also told by this end user that unless he repaid the 20 people, the micro-finance clients would not be able to make their repayments to their groups/MFI. Please recall that I have already posted in DFN and MFP about money being lent for a tourist car agency in Vizag (2005/6) as also a real estate business in Bhopal (2006/7). There are many such instances where loans in the range of Rs 20 to Rs 25 Lakhs are given to the non-microfinance people and this is set off against a number of so called micro-finance JLGs etc. Again, a rigorous client, MIS and portfolio audit should help unearth these aspects. Therefore, given, the double/triple counting, the fact that there are ghost clients and also that there are loans being made to non-micro-finance clients – I COMPLETELY agree with you that numbers are hugely exaggerated. The only difference is that number of (micro-finance) clients to be served appears to be much higher than is currently portrayed (ceterus paribus).
Third, you make the point that commercialisation of microfinance is a ‘done deal.’
Yes, I agree that the process is irreversible but only those institutions that achieve and manage (capacity to effectively manage commercial scale is very critical!) this commercialization and scale in a transparent and legally/legitimately correct manner will stand the test of time. The rest, will either be forced to re-orient themselves (like Satyam) or they may simply just vanish. History is full of such examples. The Satyam example should not be forgotten – here is a classic case of a so called blue-chip institution that in its eagerness to further scale up, show consistently better performance, get even better valuations and higher and higher returns for investors broke every rule in the book, despite winning every possible corporate governance award. What happened to Satyam is a well known story…I only hope that there are no parallels in micro-finance and the anxiety to scale up, show improved performance, get better valuation and tap markets at a premium should not encourage MFIs to engage in not-so-transparent activities. I am sure that you agree to this simple statement.
Regarding the issue of the promoters making money, I believe that, as professionals, they are entitled to it and we should not grudge them the same, if the means and processes to generate the millions are legitimate, transparent and legal.
Thanks again Malcolm
A very thought ‘provoking’ (pun intended) write up from you
I enjoyed reading this
I enjoyed reading this stimulating article, and I found myself swaying towards the pro-commercialization stance in microfinance, but in the end, I wondered why this issue needs to be looked at in ‘black and white’. Can we not accept commercialization along with certain checks and balances, instead of accepting it all the way, or completely rejecting it and grabbing our copies of The Communist Manifesto?
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