Inherent in the market for microfinance is a deep debate about its goals – should it be a profit making industry or a market that purely helps serve the poor?
According to Dr. Vikram Akula, one of the founders of SKS Microfinance, SKS will reach its maximum amount of clients by remaining profitable; “the more profitable SKS is, the more capital we can raise, the more poor people we can serve.”
However, the Indian Federal Reserve Bank has recently created a special panel to examine concerns over high interest rates, so called “coercive” recovery processes, and multiple lending practices by various microfinance institutions. The perception from some sources is that big MFIs, like SKS, do not provide low enough interest rates to benefit borrowers. There are also concerns that corporate governance in the microfinance sector promotes overly aggressive lending strategies.
Are these accusations accurate? Are any of these concerns being exaggerated?
According to Akula, these concerns are part of a witch hunt. He says. . .
“The reason there is such hostility to the SKS model is that we are upsetting a lot of vested interests. We are breaking the hold of village loan sharks and we are introducing a private sector model for development that many traditional NGOs hate. We are making it difficult for the media because our model cannot be explained in a nice tidy sound bite. It is neither development as usual nor is it business as usual. SKS blends the best aspects of both.”
There is certainly merit to both sides. On one hand, the microfinance community is in a high growth stage, bordering on potentially aggressive policies to maintain profitability for shareholders. On the other hand, the SKS Microfinance business model testifies to the convergence between financial and social performance objectives.
Although the dissent against SKS Microfinance might be exaggerated, SKS is pro-actively searching for ways to expand its financial services to the poor, with the intention of making its services more cost-effective and accessible. Specifically, SKS is planning to provide a diversified range of financial products, ranging from housing to micro insurance to lending against gold and then scaling the new products. These plans will result in a heightened supply of financial services, as well as a heightened demand for career bankers around the world.
In addition to internal risk management policies, there is an emergence of microfinance transparency organizations, like MFTransparency which is a US-based nongovernmental organization that was created in July 2008. It is not surprising that private industry is resolving many of these concerns, absent public intervention.
But will internal risk management and the private market be enough? Do MFIs need to be as regulated as conventional banks? Is SKS Microfinance doing anything wrong?
What do you think?