“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!