Betting on the Poor

“This is pushing microfinance in the loansharking direction,” said Muhammad Yunus, the Nobel peace prize-winning founder of Grameen Bank, in response to today’s news that SKS, an Indian microfinance institution, has gone public. ”It’s not mission drift. It’s endangering the whole mission.”

We respectfully disagree. The keenly anticipated initial public offering, which aimed to raise $354m, is another important step towards fully engaging the mainstream capital markets in the fight against poverty.

As we reported in the chapter of Philanthrocapitalism called “philanthropreneurship the eBay way”, Yunus made similar comments about the successful IPO of Compartamos, a Mexican microfinance bank, in 2007, and about the efforts of philanthrocapitalist Pierre Omidyar, the founder of eBay, to encourage the development of for-profit business models for microfinance.

As we concluded in the book, “a big opportunity for philanthropists may be to back ideas that, if they succeed, would profitably solve social problems, but which have a higher risk of failure than commercial providers of capital, including venture capitalists, are willing to bear. Bearing the risk of ascertaining whether the idea can be pursued profitably is well suited to philanthropy. If the idea is a dud the money can be counted as a donation to the cause of increasing human knowledge; if it only works as a non-profit, philanthropists can choose to keep funding it; whilst if it succeeds, the philanthropists can let for-profit investors take it to scale while they, having played a crucial catalytic role, can put their philanthropic risk capital to work elsewhere.”

The SKS IPO is a case in point. Whereas Compartamos got its seed funding from charitable sources, such as the Accion microfinance network and the Mexican billionaire Alfredo Harp (Carlos Slim’s cousin), SKS was seeded by traditional mainstream investors, including Sequoia Capital, a Silicon Valley venture capital powerhouse, and Sandstone Capital, as well as George Soros and Indian outsourcing billionaire (as well as noted man of integrity), Narayana Murthy.

Hopes are now high that other for-profit investors will put their money into the emerging for-proft “bottom of the pyramid” marketplace. Already this is expanding beyond the traditional microcredit pioneered by Yunus at Grameen. SKS has already sold 12.5m micro-insurance policies. Ignia, an investment firm co-founded by Alvaro Rodriguez, the chairman of Compartamos, and backed by investors including Omidyar, is seeking for-profit opportunities in firms providing a range of services to the poor, from health care to low-cost housing to schools.

”By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me,” says Yunus. ”Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people.” A better way to look at it is to see the emergence of a win-win, in which investors can profit by putting their money to work to help poor people enjoy a higher standard of living.

Certainly, profiting from providing services such as microfinance to poor customers can feel uncomfortable. Yet the experience of Compartamos shows the benefits that can flow from it. High interest rates were charged – upwards of 70% a year – but the profits Compartamos earned attracted lots more capital into Mexican microfinance, greatly extending the availability of credit to poor Mexican borrowers who would otherwise have had to go without or turn to real – ie, really nasty – loan sharks. Had Compartamos remained a non-profit, Mexican microfinance would almost certainly have stayed far smaller, with many of its current clients left worse off. Now the combination of economies of scale and competition from new entrants is starting to drive down interest rates to less alarming levels. Expect the SKS IPO to initiate similar trends in India.

Yunus has been busily developing a rival business model to the for-profit bottom of the pyramid sort. Called “social business“, it aims to earn a profit but not to return any money to investors. The most notable example so far is a joint-venture between Grameen and Danone to provide yoghurt enhanced to promote basic health to poor Bangladeshis. He is, reportedly, also to appear in the Simpsons cartoon later this year. It is not known if he will try to recruit Marge to a classic Grameen-style all-female lending circle, but Homer had better not try to start a for-profit microfinance institution in Springfield. Doh!

0 replies on “Betting on the Poor”

The whole situation with SKS is much murkier than at first glance and raises some big questions about social entrepreneurship and philanthrocapitalism.

To whit: SKS received a lot of charitable money from Unitus. SKS received a great deal of benefit from its original nonprofit tax status.

So who should reap the benefits of the IPO and in what amount?

For more, see my latest post: Why every social entrepreneur should be paying attention to SKS and Unitus

Hi Matthew

I think you raised a valid point that for-profit model could deliver great potential, and it’s vital not to be drawn into idealogical battle of whether social business/ for-profit is the only way to go. It’s way too early to place accusation of mission drift. Social finance is still characterized by innovative experimentation, we just need to be more tolerant of such development and evidence-based assessment will be more important than ever to identify the effective model.


We don’t have to infer that there was any malicious intent to consider this a complicated set of transactions that will, and should, send shockwaves through social enterprise. The fundamental social policy question is whether tax favored donations to Unitus should have been used to improve the cash flows and hence the valuation of SKS in this IPO since board members with influence over Unitus (nonprofit) programming decisions were also apparently involved in Unitus (for profit) investment decisions.

A related social policy issue is the extent to which board members and nonprofits must avoid or publicly disclose these entanglements. If I am raising charitable donations that will benefit an enterprise in which I am also an equity investor, folks may want to know that.

The more immediately relevant question for nonprofit social enterprises is what this may do to fund raising. As a donor, why should I ever again donate to a microfinance support organization? Is my donation being used as non-dilutive capital to boost returns for private equity funds?

The many nonprofits still raising funds to build MFI capacity will have tough questions to answer. (NB: Lucky for Kiva, SKS was not one of their partners.)

“By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people.”

If I may be so blunt…

Excuse my language, but this downright chaps my ASS!

How can anyone consider profiting from the poor? This is a disgusting, reprehensible and repulsive idea. Capitalism has reached an ultimate low here.

To actually “Make Money” off the misfortunes of others has to be the lowest despicable plan ever devised.

What the author fails to consider here is what if there was a major catastrophic event, which shut your precious greedy money making market down for longer than a week? How about a Month? Six months? Longer?
How will this company fair if and when the market reopens? Where’s the supposed invested money for the poor going to be then? Will the short sellers hope for its’ demise? Will the rich step up to the plate and invest in the company supposedly supporting the poor? I seriously DOUBT IT!

Let’s not mince words here, but there is no way that the proceeds, profits, call it what you will, will help the poor. Someone will ALWAYS pick the pot clean and come up with some bogus excuse to make it appear legal and legit. Count on it. Call it creative book keeping.

I’d agree that the for-profit approach has potential because it’s been deployed successfully to leverage microfinance in Russia. I’m referring to a profit-for-purpose approach where business exists for a primary social purpose.

In the case of the Tomsk Regional initiative and subsequent activity, surplus revenue rather than being distributed to shareholders in dividend is invested in efforts to leverage further social investment. This so far has been from government but we know from the example of Kiva that many are content to be returned their capital without interest.

The R&D for Tomsk was paid back with a consultancy fee, the investment of $6 million dollars repaid as is typical with the moral collateral loan circle approach to leverage around 10,000 businesses with 99% surviving a year or longer.

SOCAP10 is currently asking for ideas for investing in social purpose, since it’s recently been discovered that as much as $120 billion of US private equity is ready for social investment.

My suggestion was that the kind of business both Yunus and P-CED advocate, the non-loss non dividend social business can create wealth flows where disenfranchised communities have been deprived of them, in local communities on a global basis. It could help place disenfranchised children in families, fund ‘soft power’ action against terror and enhance wealth and democracy by investing in affordable broadband, clean water and land access as enlightened self interest.

With our model for example, employees are paid living wages according to local conditions and share in 10% of profit whereas at least 50% is invested in the community and the remainder retained for growth.

There are a very large number of people in the world not motivated by the highest return and would readily invest for a low or no interest return when motivated by compassion, a currency which is universally recognised.

Usury! Those folks feed off the poor to make the rich richer. Why should investors profit when the value created came from 70% per year interest rates to people living hand to mouth? Any rake off from an IPO needs to go back to the poor who produced the profit by promptly paying their debts. Microfinance started off enhancing the Common Good, now it serves the private good. Shameful banking. Tom Aageson

Not just microfinance, but all nonprofits are starved for capital with no social capital markets currently available. An IPO is an novel way to bring social capital and may have value for other segments of the nonprofit world. Philanthropcapitalsits are not afraid to take a risk for the better good. I applaud this new way of thinking.

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