First, an apology: I've been silent without explanation these last few weeks. I've been diverted this summer from microcredit to macrocredit as I write a retrospective on the Jubilee 2000 debt cancellation movement. The deadline has felt tight enough to squeeze out blogging (though I hope to change that soon, and will let you know) and, as a further cause of hesitation, I have been unsure about whether to post here or on CGD's main blog.
The back and forth about the initial public offering (IPO) of SKS Microfinance just provoked me to return to this feed. As he has in the past, Muhammad Yunus has lambasted the for-profit commercialization of microfinance:
"This is pushing microfinance in the loansharking direction,'' Muhammad Yunus, who was awarded the Nobel Peace Prize for his work at established microfinance lender Grameen Bank, told The Associated Press. ''It's not mission drift. It's endangering the whole mission.
''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,'' he said. ''Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people.''
As SKS has grown and attracted more commercial funding, its borrowers have seen their ownership stake fall from 40 percent to 11 percent of the company, post-IPO.
Grameen Bank, in contrast, is wholly owned by its borrowers.
Grameen's Yunus says there is a more equitable way to grow: turn to the poor for financing.
Grameen funds its loans by taking deposits---a practice Indian regulators don't allow.
''The whole thing is to allow microfinance institutions to take deposits. It is a legal question. If you amend the law---which was done for us---you take money and lend it to poor people,'' Yunus said. ''There is plenty of money in the villages.''
Understand: I haven't studied the SKS IPO enough to defend it with ardor. But I can't help noting the ironies in Professor Yunus's comments:
- When I interviewed SKS founder Vikram Akula in 2006, he expressed frustration with Indian authorities such as the Reserve Bank of India for prohibiting Non-Banking Financial Companies (NBFCs) like his from taking savings. In this sense, Vikram agrees with Yunus and the turn to outside investors is not by choice.
- Savings deposits cannot substitute for risk-absorbing, profit-claiming equity capital of the sort SKS has just raised. It is muddled to compare them in this way. In fact, the real substitute for savings at SKS and other fast-growing Indian microfinance institutions has been loans taken from commercial banks, which are propelled by India's priority sector lending requirements (somewhat analogous to the Community Reinvestment Act in the U.S.). And whether a microcredit portfolio is funded with deposits or bank loans, the lender still needs equity to absorb the losses on the bad loans it makes. If SKS took no equity, every rupee of loss on its microloans would have to come from its creditors or its depositors, which would not be tenable.
- As much as I advocate microsavings, I can imagine why the Reserve Bank of India might not find the Grameen Bank's experience with savings-taking very reassuring. The popular Grameen Pension Scheme promises 12%/year interest on deposits steadily paid in over ten years (or 10% over 5 years); those rates have helped Grameen attract billions of taka, so that it now does more microsavings than microcredit. But especially now that commercial interest rates have dropped in Bangladesh, it is not entirely clear that the Bank can keep the 12% promise. The need for a high return on its deposits may be driving Grameen to expand lending in an unsafe way. If the lending growth overshoots, who will protect Grameen's savers?
- Even if Grameen is handling its deposits with all appropriate care, as I noted in May, its capital cushion is by all appearances now illegally thin compared to the size of its lending portfolio. Seemingly, it needs to either cut back lending, which it has not done, or...it needs to raise capital. While Grameen members formally own the Grameen Bank, I think they have not been a major source of capital; most has come from donors and accumulated profits. Are the poor of Bangladesh ready to buy shares in the Grameen Bank? Grameen could require clients to buy shares to get new loans, as it does on a small scale as a condition of membership. But that seems unethical. I shouldn't have to buy shares of Citi to borrow from it. Perhaps the Grameen Bank and Indian microlenders can raise the capital they need from their clients on a voluntary basis. Since that is not a certainty, is it so unreasonable to consider the capital markets? [Update: I retract the "unethical" comment. Bangladeshis who don't want to buy shares when they borrow and save can patronize other microfinance institutions.]