Microfinance Adrift? Lessons from South Asia
There are few applications of social finance as widespread and well known as microfinance has been in the last few years. Microfinance institutions (MFIs) have attracted significant investor interest by demonstrating that lending to the poor can be not only sustainable, but also lucrative. Since then, capital has moved swiftly into a rapidly growing sector with one-third of the world’s population as the target market.
The commercialization of microfinance hit a key milestone this past August, when SKS Microfinance (SKS) in India, successfully raised an unprecedented $350 million through a public share offering - a tremendous step forward in bridging the gap between capital markets and poverty alleviation.
However, as recent news unfolds, SKS has become heavily criticized for their profit motive and are now amongst many other MFIs under scrutiny for aggressive lending practices. Perhaps it is fair warning to all social finance practitioners and proponents alike: the road to hell can be paved with good intentions. Does the backlash against microcredit foreshadow a fate for all social enterprises, or can we somehow learn from the process?
Clearly, there are important lessons to be taken. For example, unlike banks or MFIs in other parts of the world, Indian policy currently prohibits MFIs from taking deposits from their borrowers. This creates a systemic disconnect between promoting financial independence and promoting debt as a product to be sold in order to stay in business. Conflicts between a seemingly sustainable revenue strategy and its social mission may only be revealed when it is taken to extremes, or reaches a scale similar to that of microfinance. Imagining a worst-case scenario like this is a great way to identify potential inherent flaws in a double bottom line business model. Whether it is shortfalls in legislative policies or operational limitations of the business that create these conflicts, it is important for organizations to critically consider where they may exist and what the resulting worst-case scenario would be. How will it impact your judgment and what can be done to mitigate these risks?
One place to look is in the evaluation of success. As a socially driven business leveraging the capital of profit seeking investors, one must be bilingual in communicating impact. SKS started as a small non-profit just over 12 years ago and has since grown tremendously. However, their operational and financial information makes no mention of quantifiable poverty alleviation targets, even today. Anecdotal stories are nice to read, but until social impact metrics are implemented and enforced with the same vigor as financial metrics, investor expectations cannot be wielded to accept both as equal indicators of success. Inevitably, compromise to the double bottom line will be made in favor of one or the other.
This is why industry infrastructure & regulations ultimately play the strongest role in guiding social purpose businesses and protecting the vulnerable. The lack of credit reference bureaus in developing parts of the world, for example, has made it prohibitively expensive if not impossible for some MFIs to determine whether a potential borrower has already over extended themselves with debt or not. Until government regulations catch up to the rapidly shifting ways in which business is conducted, initiatives like the Smart Campaign for the microfinance sector will continue to create guidelines for investors and practitioners alike to benchmark against. To date, there are over 1,500 organizations in more than 100 countries that have signed on to Smart Campaign’s Client Protection Principles.
In the end, microfinance has been and will continue to be a leading model for creating economic sustainability amongst the poor. Innovators in the social finance space must be accepting of the fact that – regardless of social purpose – if you develop a model that proves lucrative, it may be used with or without noble intentions. We know this is no reason to abolish the growth of a valuable industry or service. If anything, it creates the impetus for management and innovators to build sound and transparent organizations, and for regulators to establish frameworks that enable rather than limit good practice by all.
Photo credit: http://www.flickr.com/photos/sociate/4094575799/