SKS Microfinance float poses question of profit and exploitation
Rhys Blakely, Times
Plans for a stock market flotation by India’s largest private microfinance lender have further inflamed the debate over whether the industry should be putting profits or the wellbeing of its impoverished clients first.
SKS Microfinance specialises in lending small sums to very poor borrowers, many of them women, a process that it argues is helping to tackle poverty by funding small businesses.
The group, whose investors include Sequoia, the venture capital firm that famously backed Google, has talked to three investment banks — Citigroup, Credit Suisse and Kotak — about a listing in Mumbai that could raise up to $250 million (£150 million).
The deal, earmarked for the autumn, would be the first of its kind in India, one of the world’s biggest microfinance markets, and would offer investors exposure to a sector that many believe has huge potential. Some estimates have suggested that global demand for microcredit stands at about $250 billion, ten times the amount lent so far.
Citigroup and HSBC, the global banking giants, have talked about making it a mainstream business, prompting Time magazine to comment on how “the pinstripes are chasing the poor”.
SKS — which stands for Swayam Krushi Sangam, or self-help organisation — was founded in 1998 in Hyderabad as an non-governmental organisation. It has grown from having about 30,000 clients in 2004 to nearly four million this year. In the same period, loans outstanding have risen dramatically, from $2.7 million to $491 million.
The company’s prodigious expansion mirrors the fortunes of the wider industry. In the 32 years since Grameen Bank, the first microlender, opened for business in Bangladesh, poor borrowers have proven astonishingly creditworthy. Microloan repayments typically top 97 per cent, far higher than conventional lending. Muhammad Yunus, the Nobel Peace Prize-winning “godfather of microcredit”, who founded Grameen, has spoken about a future in which people visit “poverty museums” because deprivation has been eradicated through tiny loans given to poor people to help them to start small businesses.
But the sector has also been dogged by controversy. When Compartamos Banco, Mexico’s largest microlender with more than 840,000 customers, went public in 2007, it raised $450 million for a group of backers that had originally invested only $6 million. Moreover, it emerged that the bank routinely charged annual percentage rates of interest of more than 100 per cent — about treble the global microfinance average. Its return on equity is more than three times the 15 per cent delivered by Mexico’s conventional lenders.
A paper written for a review by Stanford University in California said: “The Compartamos IPO raises a red flag: there is something decidedly unseemly about profit-maximising investors backing [a microfinancier] that charges 100 per cent interest, compounded annually, to the world’s poorest people.”
According to Larry Reed, of the Boulder Institute of Microfinance, a specialist think tank, the sector “faces a moment of reckoning”, as the industry’s rapid growth gives rise to accusations of aggressive collection policies or excessive profits.
There are fears among some of the industry’s leading figures that the SKS listing could further raise the pressure on the group to make profits, possibly at the expense of poor borrowers.
Mr Yunus recently told the Indian media: “Of course [microlenders] serve the poor and make huge profit, but I would not support it. That’s what loan sharks have been doing over centuries.
“In going for an IPO, if SKS does not make it clear that they will make absolutely sure that their interest rate will not exceed ten points over the cost of fund, I will get very worried. I don’t wish to see SKS following the Compartamos path.’’
Vikram Akula, the SKS founder and chairman — who has been included in Time magazine’s list of the world’s 100 most important people — would not comment on the IPO plans, but he told The Times that his group hoped to steer a middle path between the microfinance model proposed by Mr Yunus, where funds come from sources that do not expect to make significant returns, and the Compartamos model, where investors buy in because of the possibility of earning huge profits.
“Do we believe that microfinance can be profitable? Absolutely,” Mr Akula said. “Do we believe profits have to come at the expense of clients? Absolutely not.”