Microfinance Or Loan Sharks? Grameen Bank And SKS Fight It Out

At the Clinton Global Initiative, FORBES was a fly in a conference room, attending a special session on: Profiting from the Poor? A Discussion on Microfinance IPOs. Vikram Akula, founder of SKS Microfinance, India’s biggest microfinance institute that is poised to become the largest in the world after its recent IPO (and has billionaire Vinod Khosla and Sequoia Capital as investors amongst others), slugs it out with his one time idol, Muhammad Yunus, the Nobel Prize founder of Grameen Bank and the father of microfinance.

Muhammad Yunus: Let’s first define what micro finance is. It’s lending money to the poorest women for income generating activity, without collateral, so she can help herself out of poverty. If you cross that boundary, then use another term because when you use the term micro credit, you confuse people. Then loan sharks can say they are doing micro credit. I say find a name for yourself: call it [Bottom of the Pyramid] BOP credit.

Vikram Akula: I see Yunus as a mentor and like Grameen Bank, SKS gives micro credit for income generating activity, collateral free…. [The question is] how do you design micro finance in a way so you don’t say no [to anyone who needs it?] You do it by accessing capital markets and yes, commercial microfinance is an important tool for inclusive access.

Yunus: I’m not opposed to profit. Grameen Bank is a bank. But ownership is the question. Grameen Bank is owned by the borrowers and the profit goes back to them. We oppose that the money of the poor people goes to someone else; [or at least] is there a rule restricting the percentage of profit that goes to someone else? We are opposed to who makes the profit and how much. If it’s 1-2%, go ahead. Vikram says he can’t give money to the poor people who need it [because there is a lack of funds.] We say, go ahead and start Grameen Bank. Each branch mobilizes its own deposits…. We live in an ocean of money. [In Bangladesh, 80% people have access to micro finance.] Instead of rushing to the capital markets, rush to the government [to demand a license] to open a bank.

Akula: In Bangladesh there was a special act by Parliament that allowed for deposit taking from borrowers. That’s not the law in India. Our urgency is how do we reach all the people we need to reach. Commercial capital markets are the only place to get those funds. Over the last 12 years SKS got 7 million clients, we have grown three times as fast as Grameen Bank…. Scale and rapid scaling is very important.

Yunus: Many branches of Grameen Bank have more money from savings of borrowers than from outstanding loans. Having external money slowed us down from our model.

Akula: Yes you increase profits by pushing up loan sizes and raising interest rates. But SKS loan officers are not incentivized by loan size; we want him to give out the right loan amount. The logic is to create great shareholder value as she [the woman who takes the loan] moves up the laddre to take multiple loans for multiple products. SKS has reduced interest rates from 36% to 24% and in the same period ROE has gone up from 5 to 22%. You can bring these two elegantly together.

Yunus: Conventional business has its own logic; there’s no getting away from that. You get caught up by “others”–other shareholders and that’s the wrong direction. Micro credit should be about local money. When you get outside money, you get the risks, the volatility of it [too.] You could’ve lobbied with the government [to pass an act similar to the one in Bangladesh.] Microcredit is not about exciting people to make money off the poor. That’s what you’re doing. That’s the wrong message completely.

Akula: Getting a banking license in India is nearly impossible…. One challenge we had was access to capital and because we went to the capital markets we could get the capital…. A woman [taking this loan] is not concerned with who is making a profit but if she’s getting her loan. Yours is maybe the more morally pure way but it’s a long way away from helping all the people who need it.

Yunus: You have to bring in patience and passionately pursue it. If you don’t even try, it’ll never happen. You go to the easier solution.

Akula: We need more than one approach with 3 billion people to save. I will take up your suggestion and lobby the government as well. But I don’t think it’s fair to make a poor woman wait while the government [changes its laws.]

Yunus: You didn’t come to me. I could’ve done that [lobbying] for you.