One of the fields in which the forces of capitalism and those of altruism come head to head is the unlikely field of microfinance. Microfinance as a concept was pioneered by the Nobel Laureate Mohammed Yunus in Bangladesh; it involves lending very small amounts to the poor, often as little as $50, for a very small business activity. The poor are untouched by the banking and credit system and microfinance stepped in to fill the breach. It has done wonders in terms of poverty alleviation, in Bangladesh and in a few other countries where it has achieved scale.
But should microfinance be a charity or a commercial enterprise ? Both models exist. Grameen Bank, Mohammed Yunus’s organization is more at the charity end of the spectrum than at the commercial end. But take the case of SKS Microfinance, India’s premier microfinance entity. It’s run as a commercial enterprise and ahs achieved considerable success.
Such an approach has brought benefits undoubtedly. SKS has brought in terrific processes on loan evaluation and disbursements. Standardisation and big efficiencies have been achieved in running operations. There is very little corruption, as they are not dependent on government grants. They have better access to capital. All very good.
But the problem is that interest rates are high as they seek a profit. Mind you, not as high as the village money lender who usually charges an extortionist rate. But still ….. SKS’s average rate of interest is 28%. SKS rightly says it could charge more – maybe 40%, but it does not as it has set its tradeoff between making profits and not exploiting the poor at this rate.
The high rates are because of the high costs of reaching far flung villages and administering such very small loans. But still, it is difficult not to baulk at interest rates like 28%. How do you run a business, however small it may be, when your cost of capital is so high ?
Yunus contends that any microfinancer who charges 15% more than the cost of capital, must either cut costs or profits and pass the benefit to the poor. SKS’s differential is about 18%.
The debate has been accentuated as SKS is now going in for an IPO. The founders say they need capital to grow and the market is the best place to access it. True. In the process they will make a lot of money. Normally , you would laud any entrepreneur who has achieved success. But in this case, the money making sits a bit uneasily, for, it has come from the very poor.
As microfinance grows in popularity, there is the risk of a “sub prime” happening with dire social consequences. Yunus’s Grameen Bank behaves extremely responsibly. Commercial microfinancers might not be so , and you could argue that social implications of debt is not their remit. The propensity in India for the poor to get into debt for non productive reasons – usually dowry for the daughter’s marriage - is legendary. Inability to repay, and therefore bonded labour, is endemic.
I can see both sides of the argument. Can you (Should you) make money from the poor ? Yes. And No.
I’ve often found Narayana Murthy’s, the founder of Infosys’, philosophy very appealing – you must be a capitalist in the head and a socialist at heart. But in this case I am not sure whether you should rule from the head or from the heart.
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12 comments:
Very tough one Ramesh! Wise ones recommend to choose head over heart, hence tend to tilt more towards commercial end of it. Firstly because it extends the benefits of credit facilities to the poor who were untouched for years. Secondly, they are reaching out to them at a rate still cheaper than other available sources. The decision to take or not take the loan always lies with the end consumer.
True, they will make a lot of money going forward which may be good thing for economy in the hindsight. However, an important factor is to contend the associated risks and conduct business in the most efficient manner. As long as one grants genuine credits to poor and they are willing to pass on the credit for the facility received, it should be ok.
Indeed a tough one!
@Vishal - Can understand your tilt. Its a very logical stance. My discomfort comes from what is the "fair"division of the spoils between the shareholder, the customer and the employee in such a case , with an uninformed customer, bereft of choices and having little power.
Just a few thoughts[even may be on an unrelated note]
I know of instances where the interest rate is 120%. Yes you read it right.
There are other form of lending system, where you can borrow 100 in the morning but have to give back 110 in the evening. This is more prevalent among the roadside hawkers such as flower merchants! We also have other kind of lending systems such as compound interesting, interest over the interest, apart from the interest over capital, interest over delayed payment.
The standard private lending rate is 36% where the borrowed amount usually starts around 5000. When the borrowing amount reaches 50000 the interest rate falls down, with the increase in capital some time you could borrow it even for 12%.
The private lending for automobile loans is another story. [I have felt those lenders are fair game and even considerate!]
One model that atleast works pretty good and in the favor of poor people is the self help groups or SHG's.even they are no exception for the victim of corruption still they are altruistic. very low rate of defaulters.
IMHO, the root cause or the need for all the microfinance and private lending is the rules and regulations and the idiotic moronic way in which the government banks work.[an example, education loans (not)provided by banks, the circumstances where it will let you scot free of the entire amount you borrowed] If only the government banks could have a motive of serving the needy deserving people, life would be a lot better to lot of people!
To sum it up,my gut feel is [though i dont know much about SKS] it would be nothing else but another avenue of money lending which would be legitimate! For a country like India, we may need more Yunus in different sizes!
sorry for the long comment.
After reading the post, all i can think is that philanthropy, an empathetic heart and helping poor people are the forces which seem to have given fillip to this idea of microfinancing. The thought of making a lot of money (commercialisation) is relegated to secondary place when someone thinks of meeting needs of poor people. Such a business should be ruled by heart and mind should be given sufficient authority to make sufficient money so that business is continued.
@ Ramesh - Proportionate distribution of income is definitely a key factor. Indeed, those are the factors which need to be balanced or perhaps regulated. Ultimately, the money factor shold not gulp the underlying purpose completely and there must be enough transparency in the business.
very tough dileama indeed. But i somewhere tend go by your post on the logic of chinese youngsters bleeding in tough working conditions but still, it is a way of alievating poverty and growing the nation.
as long as the micro finance chanellises itself into an investment by the farmer into a growth, its ok, even if it comes @ 28%. the profit which sks will make is not by bleeding a farmer of all his wealth like a money lender but by making small money from millions of farmers. (again similar to the chinese factories - the profit per piece of whatever output they make must be piddley)
but the catch as you rightly said is when the borrowing is for non productive reasons - its a downward spiral -- wrong for head - wrong for heart and there both the head and the heart must synch in ensuring the stringency of evaluation of the motive. difficult however as you beautifully put it.
another amazing perspective from the genuis. thanks
@zeno - Superb comment. Yes, awful lending systems exist. By comparison to the village money lender, credit card companies will see like saints. I gather you are in the Mohammed Yunus camp - commercial with a philanthropic philosophy.
@KC - Understand. But there aren't enough Mohammed Yunus' around. Hence a commercial microfinancier might not be a bad idea.
@Vishal - Yes, agree
@Sandhya - As always, a very perceptive comment which I heartily and totally agree with.
The thought of Capitalism indeed being pitted against Altruism is very eerie. Being the romantic optimist that I am, I want to place both on the same side.
Thinking aloud here (and at the cost of sounding dumb), these are some CP points from me teacher!
1. Microfinance essentially is a model which is meant to finance small businesses, therefore the prerequisites of the business model have to have low interest rates and low processing costs. So, if there is a firm operating against this, wouldn't it stand corrected in a Capitalistic environment? Besides, if it goes on like this, the clients are sure to default.
2. With SKS coming out with an IPO, there would be many more entering the market, and would they not bring in more competitive service, price and business models.
My question is, I have no doubt in my mind that filling your coffers off poor man's money, is like stealing off a dead body. But isn't there hope in capitalism itself to correct these flaws in the microfinancing business?
@Deepa - May your romantic optimism always flower and com true. Maybe in the bigger picture, what you say might very well be the case.
I would never blame credit card companies, cause it is the educated idiots who fall for it and suffer out of it. When you personally hear the credit card suffering stories, you would definitely start wondering the sanity of the person! You end up with a village money lender cause you do not have a choice and your back is up against the wall.I am more towards a good banking system which makes the disbursement of loans little easier which will not drive me to these private lenders.[Yunus or SKS]
I think microfinance is best way to allievate poverty rather than doling out freebies which our Indian politicians tend to do. They can live their life with self respect rather than live in misery .
This can prevent lots of farmers from taking the extreme step as they do in some parts of the country.
@Sanjay - Agree. Economic activity is better than freebies, but I am still not entirely comfortable with a purely commercial microfinance model.
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