From SKS to Andhra Pradesh in India

In the month of October, this blog ran a series of posts on the SKS IPO. It was meant to spur discussion and present a variety of voices on the issue. It did, thanks to the authors (Rasmussen, Harper, Sen Sarma, Waterfield, Crawford, and Danel) as well as the lively comments by readers.

From the rich conversation that was generated, here are the main issues that emerged and some of the many highlights from authors as well as readers.

There has been an explosive growth in microfinance institutions in the last decade, with many of them transforming themselves from nonprofit to for-profit financial institutions. While this trend is viewed by many as facilitating a sustainable business model that can provide financial services to more poor at lower costs, it has also invited criticism from pioneers of this field such as Mohammed Yunus who argues that the term “microfinance” should not be used for commercial MFIs.

In the series’ kick-off piece, Stephen Rasmussen asked six questions to SKS about how this IPO would benefit the poor:

“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?”

Malcolm Harper’s provocative piece argued that SKS should be treated like any other commercial enterprise that is part of a global capital market, like Wal-Mart:

“Is SKS any different from Wal-Mart? And does it matter if it isn’t? Because when the promoters of SKS make millions out of a business whose original objective was to serve the poor, that’s capitalism. Cooperative 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.”

In his view, an MFI should be judged on the basis of whether it can 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,” he concluded.

Since the SKS IPO was floated, there has been much speculation in the media and by experts around the globe about whether this trend of commercialization and tapping capital markets will lead to a drift away from the original promise of microfinance – helping the poor.

Moumita Sen Sarma’s post pointed out that the current policy context in India makes it even more imperative that microfinance’s impact rather than profit is the priority:

“With an already nervous RBI (Reserve Bank of India) and Ministry of Finance wary of the path being charted out by the Indian MFIs and now SEBI (Securities and Exchange Board of India), the market regulator asking SKS unpleasant questions, it’s perhaps a time to pause and introspect. In the end, shouldn’t the true measure of an MFI’s success be when people on the street instead of asking in surprise ‘So is microfinance really that profitable?’ as they did in the wake of SKS IPO, ask rather ‘Is microfinance really that impactful?’ We need to shift our focus away from the means and on to the end.”

Among the many comments concerning mission drift, here is one:

“Will SKS diversify their portfolio suited to the clients’ needs in a manner to generate an equally balanced income from both interest based source ( micro credit ) and non interest based source like fees & commission (micro insurance) for sustaining financial impact and social impact as well?” –V.Rengarajan

The only other “pure” MFI to go public in the world was Compartamos in 2007. Carlos Danel’s piece argued that Compartamos had not drifted and that “if you do an IPO, you’re not inevitably doomed to drift.” As evidence, he provided some data on the MFI’s growth and productivity post-IPO:

“In the past 42 months, Compartamos has grown from serving 614,000 clients to serving 1.75 million, a 191% increase in outreach. Of those, 98% are (still) women and loan size has increased marginally 0.002% (in pesos), currently at 391 USD per borrower. Our internal culture has been sustained, if not improved, from being named the fifth best company to work for in Mexico in 2007, to number 1 in 2010. Transparency is now not only a voluntary trait, it’s a regulatory requirement. Efficiency is 17% better with a cost per client of 125 USD, still well below the average of 176 USD for Latin-American MFIs, and pricing has continued to drop steadily, as it did before the IPO, to 68% average APR (plus VAT).”

Chuck Waterfield’s post analyzed whether the IPOs signal the coming of age of microfinance markets. Asking an essential question, “How much profit is too much profit?” He compared the two IPOs by SKS and Compartamos, asking:

“Why should we make significantly higher profits loaning to the very poor than commercial banks make from the middle-class and wealthy? The Compartamos IPO resulted in a 300-to-1 return on initial investment to the original investors. The SKS IPO resulted in what looks like a 12-to-1 return to the original equity investors. IPO returns were much lower for SKS, but the SKS returns are still higher than the commercial business world, and the public still wonders if we have any limits.”

On the other hand, Gil Crawford argued that “good business is good development” and that commercial microfinance leads to better governed institutions. In his view, the most sustainable way to attract capital is through commercial markets. He cautioned against capping interest rates as that might be counterproductive:

“It has been suggested that limiting the profits of MFIs is a way to prevent exploitative profiting off the poor. The only realistic way that we can see to limiting profits is to cap interest rates. This has been counterproductive, most recently in Nicaragua and Venezuela. I believe that any implementation of interest rate caps will perversely and significantly hurt the working poor. MFIs will be forced to focus on a very specific, targeted market that is cheap to serve and reliable in repayments. Incentives for innovation will be destroyed, as will the desire to offer small loans to the poorest of the poor or to expand to rural areas that are more expensive to service. At the end of the day I fear that we would see MFIs begin to mirror the worst attributes of large utilities: minimal competition, low levels of efficiency and a lack of product innovation.”

The issue of governance was a concern for many readers. For example:

“How appropriate is it for a financial services institution like SKSML – especially, one that is meant to service poor clients – that had significant public money (SIDBI’s investments) and client money (MBTs), to lend (interest free) to its own founder director to buy shares in the same company? Is this a good practice of Corporate Governance? Should this be allowed in MFIs?” –Ramesh Arunachalam

In the recent weeks, as the events in Andhra Pradesh have rapidly unfolded, the questions and issues raised in this series resonate loudly. We thank you for your participation and invite you to our next series on the Andhra Pradesh crisis starting today.

The series will feature many experts deeply familiar with the Indian context, starting with Justin Oliver’s post with fresh data from a new study by IFMR on rural households and their access to finance in Andhra Pradesh.