THE BLOG
11/04/2010 09:37 am ET Updated May 25, 2011

An Increasingly Important Debate: Microfinance as a Non-Profit or Possible IPO?

Please watch the recent debate between the founder of the Not for Profit Grameen Foundation, Alex Counts, and the founder of the once Not for Profit organization, Indian SKS Microfinance, Vikram Akula. SKS became a For Profit company in 2005 and went public in 2010 with an IPO raising $358 Million.

Both focused on Microfinance, loaning to the world's "poor". The Grameen Foundation's fund manages $25 million for MFIs around the world and includes a technology focus as well. Both Alex Counts and Vikram Akula worked with Muhammad Yunus and the original Grameen Bank lending model.

The for profit architecture raises a disturbing question at this turning point in Microfinance. There are over three billion people living on less than $1 a day and need access to financial services. But as they pay back (and the Grameen model loaning to women has proven to be especially successful as they pay back at around 98%) they are virtually paying back themselves as the women of Grameen are also the owners of the bank. In the case of a for profit Microfinance lending situation which does indeed tend to find a more capital more quickly, "investors" loan money to the poor, and then those investors pocket high returns on loans with high interest rates and a return on their money which they are not now finding at "home" in traditional investments and in the West in general. Though interest rates are still high on traditional Grameen style loans the interest is paid back to the bank the women own, thus to themselves, to help finance more loans, a personalized person to person weekly service, savings and insurance, as well as studies which measure the social impact on those same borrowers/owners of the MFI.

This split between the increasing presence of for profit MFIs and the traditional not for profit world of microlending has created a real divide in the world of Microfinance. As I listened to the debate and to the arguments put forth by Vikram Akula I intellectually understood that the one way to raise the billions needed from the capital markets to allow for loans to literally every poor person who wanted a loan and to do so quickly was to make it into a commercial venture, and yet alarm bells were going off in my head. It took Grameen Bank decades to loan to as many people as are now loaned to by the for profit SKS. But I kept thinking about something Dr Muhammad Yunus, the founder of the Grameen Bank and winner of the 2006 Nobel Peace Prize, had repeatedly said about the different forms of Microfinance...that if the lending became a for profit business, we would end up with the same situation Microfinance was created to stop, that of loan sharking. In other words, we would eventually have to re-create true Microfiancne all over again because there would be a huge risk that for profit Microfinance could end up playing the role of the loan shark. And that could bring down all the good works of Microfinance.

Donor capital in a for profit situation does allow for a more rapid achievement of large scale lending, but it also creates a moral dilemma, the most dramatic one being, the fact that it reinforces a kind of economic colonization of the rich versus the poor. Think about it, as Yunus says, we all have parts of ourselves which are both selfless and selfish. The selfish part can go and make profits in so many sectors, building businesses, supporting entrepreneurs...that is all wonderful and at the heart of healthy capitalism. But the selfless part, Dr Yunus asserts, that is the part that can interact with Microfinance in a way which demonstrates a huge social impact. This is also at the base of his idea of Social Businesses, in which the profits of a company formed as a social business, are measured by its social impact, not just the money which comes in (which should indeed cover the investment and allow it to function in a no loss no dividends way with any profits allowing for replication and expansion of the effects of the social impact). We have seen with the Danone Grameen social business yogurt factory in Bangladesh that private companies have a huge amount to gain by all that they learn from social businesses which they can then apply to their for profit side of their business.

There is something people tend to overlook when talking about for profit and even social business type approaches, that the ones who are doing the "helping" or "investing" are not only in some cases making back financial profits (in the case of an IPO or commercial for profit MFI) but are also learning how these new "developing world" markets and micro-distribution systems (and how often women are at the heart of them) work which can allow them to have a foot in the door in their future for profit investment activities and other business growth. We in the West, are looking for new places where we can come up with higher returns for our money...and in the cases of for profit MFIs some of these investors are already billionaires or become ones through their for profit MFIs (Compartamos in Mexico for example). Is there not something simply immoral in already being incredibly wealthy and then making even more profits off the backs of the poorest in the world? And then not even acknowledging that we are indeed learning from what they already know how to do much better than we do?

Grameen style Microlending is based on trust. For profit lending is not. This is also a huge difference.

I would have to agree with Muhammad Yunus and say that this kind of for profit lending is indeed a repeat of the villager loan shark model. We see it in the West now more than ever during the Recession/Depression with the increase in check cashing, payday loans and even foreign remittance ripoffs. It hurts the poor in the end and it ends up creating an even bigger gap between the wealthy and increasing pool of poor people. It sets the standards for a new kind of economic colonization especially when the investors in the for profit MFIs are wealthy foreigners. (I just realized that MFI could also be in some ways the IMF).

Commercial approaches are not all bad nor are all IPOs to mobilize capital, as Alex Counts asserts, but he clearly states his disagreements. He defines three types of MFIs: 1) Unethical 2) Ethical and profit maximizing 3) Ethical and social purpose driven. He asserts that for profit MFIs should focus on benchmarks to measure themselves with the Poverty Index created by various well respected organizations such as the Ford Foundation and Grameen. They should ask themselves questions such as: Are these MFIs really focusing on the poorest of the poor? And with all the profits of the commercial models, how much of it goes back to pay for social impact studies to measure their "success"? Private benefit, foreign investors, and caps of profits which can bring down interest rates are areas which need to be focused on as people "cash in" on commercial MFI successes. Grameen Bank is owned 95% by its clients and without foreign ownership but once the IPO happened the SKS clients/borrowers owned smaller part of the overall bank whereas the (some foreign) directors owned and profited much more. Grameen's directors do not profit at all which keeps them focused on social impact. Also Grameen helped its fellow microcredit organizations to help grow Microcredit. So its "competitors" are also its allies. This is sadly not the case in the world of for profit MFIs.

Real sustainability and true growth must include elements of deep solidarity and commitment to focusing on helping the poor, and the realization that, "I am Another Yourself".