Can microfinance be both moral and profitable?

I have recently stumbled upon a CNNMoney article on microfinance that talks about SKS Microfinance Ltd., India's biggest microlender', debut on Bombay Stock Exchange.

At first, I saw no problem with SKS' Initial Public Offering (IPO). By going public SKS will attract more money to its business that means more loans for India's poor. Yet, I forgot that as a public company SKS now will be accountable to its shareholders, who are interested in profit-maximization, not in serving the poor. How does a microfinance organization boosts its profits? You got it - by increasing interest rates on its loans. Now, this, of course, has been the main criticism of the founder of microfinance, Muhammad Yunus. He affirms that any microcredit organization charging its clients more than 15% interest rate does not truly serve the poor, rather it is in a profit-maximizing business.



So, is there a way for MFIs to get investment without raising their interest rates? The answer, yet again, lays in creative and unconventional thinking of Muhammad Yunus. The answer is social business, a business that functions in every way as a regular profit-maximizing enterprise except that it is not. Instead of profit maximization a social business' only goal is to serve a cause. Thus, a social business uses all its profits solely for the expansion of its operations. Moreover, a social business can be social in a different way, having poor people as its shareholders. In the beginning though social business has to be supported by regular investors, who will put their capital into a social business as into any other one, the only difference being that they will not receive any dividends. As soon as a social business becomes self-sustainable, investors will get their money back and will be able to decide to reinvest the sum or spend it on something else. The motivation behind investing in social businesses is simple: the desire to do good, which is in human nature and which brings if not material then emotional and spiritual benefits.

Therefore, only if SKS was operating as a social business and if its shareholders had altruistic and idealistic minds, then SKS could have continued to truly serve the poor at the same time getting enough investments to run its business and expand its operations. Yet, in the business of serving the poor there is no place for self-enrichment. That again proves Muhammad Yunus' position, arguing that any hybrid business model will ultimately sacrifice its altruistic values for profit maximization.

And yes, did I mention that Vikram Akula, the founder of CEO of SKS, has recently sold his shares of the company for $10 million? He says he is not ashamed of it, stating that rewarding microfinance employees is part of his business strategy. That's a nice reward, isn't it? Especially that much of SKS' original capital came from public donations and grants.

Now, where do you stand on this issues? Do you sympathize with Mr. Akula's strategy or admire Mr. Yunus' altruistic position? If you haven't made up your mind yet, you will probably be able to do so after watching Muhammad Yunus' and Vikram Akula's debate on September 21st at the Clinton Global Initiative.

Microfinance: Propoor Nonprofits

There ARE ways of making microfinance work even without raising interest rates and truly serving the needs of the poor. One such example is EARN, a nonprofit putting microfinance to work for low-income Americans in the Bay Area. 100% of donors’ money go towards changing someone’s life and are matched twice, by federal grant and Earn Savers program.

Another nonprofit that I can personally ( as I am interning with them) recommend is Color Me In!, organization combining microfinance and tree-planting. Rural Zambian enterprise groups receive microloans for small business development that can be partly repaid by planting trees, 1 tree per 1USD borrowed. As a result, CMI not only empowers the poor, but also helps counter deforestation that has been plaguing the country for many years. CMI is currently raising $6000 to fund two enterprise groups in Zambia. One loan will help fish farmers expand their business, while another will go towards building a community school for 30 orphans. 90% of donations will go straight to support these loans, while 10% will be spent on communications and reporting over the next year. Finally, Color Me In! does not charge any interest rate on its loans in most cases, while in others lets the recipients define the interest rate themselves (which is usually 5-10%.)That is just one example of how smaller nonprofits without much publicity can have much more effective and transparent programs than their big media-loved counterparts.

Heifer International is an example of a different kind of microfinance organization. It gives microcredit loans in the form of domestic animals, such as cows, chickens, and goats. This way famers are not only able to feed themselves, but can also achieve stable income by selling surplus and breeding domestic animals for sale.

Another great nonprofit is Women For Women International that ultimately connects women-donors from the developed world with the women in need in conflict and post-conflict countries. Their Sponsorship Program has truly changed lives on both sides of the world, because as women in Africa, Asia, and Latin America benefit financially and become empowered, women in the US become inspired and happy that they are contributing to a greater cause. Not only a donor knows a recipient’s name, but can exchange letters with her that truly creates life-long relationships.

I was planning to include Kiva.org in my list of microfinance organizations, but, first of all, it doesn’t need much introduction as a top peer-to-peer microfinance organization and, second, I was not satisfied with the interest-rate they charge their recipients: average interest rate among Kiva's partners is 38%. Kiva, no doubt, does create change, yet it could have been much more effective and less bureaucratic.

In the end, the hardest part in identifying effective and transparent microfinance nonprofits is that most of them do not openly state their interest rates and, thus, you have to do an in-depth research. Doing and donating to charity work is not enough, effectiveness is the key if you want to create the most change for your money.

My next post will cover social business as coined and defined by Muhammad Yunus and that may be the long-awaited answer to aid effectiveness.

Microfinance: Helping the Poor or Making Profits?

As I noted in the previous post, there are virtually thousands of microfinance organizations out there nowadays, yet they are not equally transparent and effective. Even more so, some so-called microfinance organizations have trailed-off from the original mission to help alleviate poverty and became regular profit-maximizing businesses that exploit the poor. That is exactly why microfinance movement was started by Muhammad Yunus in 1976: to give people an opportunity to lift themselves out of poverty and break their unhealthy dependence on money-lenders who were living off them.

Mr. Yunus divides all microfinance organizations into 2 categories:

1. Poverty-Focused Microcredit Programs, ex. The Grameen Bank.
These programs charge loan recipients interest rate starting at the market price of the cost of funds up until additional 15% to that price.

2. Profit-Maximizing Microcredit Programs.
These businesses charge more than 15% on top of the market price of the loan and, thus, in Yunus’ words, operate in moneylenders’ territory.

To the defense of the latter, Kiva.org, one of the most famous microfinance organizations, explains why microloans have to have high interest rates. It all makes sense, but in a nutshell, the poor have to pay for the bureaucracy of NGOs, i.e. transactions costs, staff meetings, monitoring, etc. While it is an undoubtedly reasonable argument, for me, low interest rates define an effective microfinance organization, such as Grameen Bank that somehow managed to do so. Another explanation of high interest rates, as Muhammad Yunus notes, is that it helps microfinance organizations become self-sustaining in a shorter period of time. Again a very logical reason, however, the poor should not have to pay for that. Intensify your fundraising outreach, write more grants, what have you. The poor should be nothing but the beneficiaries of the program! Besides, there are other ways of reaching self-sustainability, such as establishing savings accounts for the poor or giving the loans for all the upper classes with regular high-interest rates.

The list of exemplary (and not-so much) organizations based on the criteria I outlined above is right in the next post.

Microfinance and The Grameen Bank - Revolution in the Aid World

To put things into perspective, microfinance has simply revolutionized the development world. The reason is that it has proved that with really small amounts of money, truly big results could be achieved. Yet, even this is not the major benefit of microfinance. As Muhammad Yunus, the inventor of microfinance, says:

"[Microcredit] lets individuals explore their own creative potential […] Microcredit turns on the economic engines among the rejected population of society. Once a large number of these tiny engines start working, the stage is set for big things.”

Indeed, Muhammad Yunus set the stage for big things: in 1983 he founded The Grameen (“grameen” means “rural” or “village” in Bangla language) Bank in Bangladesh that gave microloans for small business development to the country’s poorest and neediest, the ones who were rejected by the formal economy. In 20 years the bank became a self-sustaining social business. Even more so, The Grameen Bank has grown and spread out to become The Grameen Family of Businesses that include 25 for-profit, non-profit and social business enterprises, all of which aimed to alleviate poverty in bangladesh and worldwide. In 2007 80% of poor Bangladeshis were reached out with microcredit (with the help of other microcredit NGOs.) By 2012, Yunus projects, 100% of poor Bangladeshi families will be able to obtain microloans.

Of course, such success has been picked up by other bright minds, especially after the enterprise got a worldwide recognition in 2006, when Muhammad Yunus and The Grameen Bank were awarded the Nobel Peace Prize. Nowadays there are thousands of local and international nonprofits specializing in microcredit and its various forms. The true beauty and potential of microfinance is that it can be tailored to specific needs of any given community or a country.

In my next post I will list grassroots and international microcredit NGOs that proved to be the most effective and create real change on the ground, so that

“Our Grandchildren will have to go to museums to see poverty," Muhammad Yunus.

P.S. To learn more about The Grameen Bank and Muhammad Yunus' philosophy and approach to combating global poverty check out his books:

Banker to the Poor: Micro-Lending and the Battle Against World Poverty; Public Affairs; 2003; ISBN 9781586481988
A World Without Poverty: Social Business and the Future of Capitalism; Public Affairs; 2008; ISBN 9781586484934

I am reading the latter one and it's full of 30 years of experience, great ideas, and inspiration!