Making Money While Doing a Good Thing

Microfinance refers to the providing of financial services to low-income clients, especially those who traditionally lack access to banking and related services. This includes not just loans but also savings and insurance. Those who promote microfinance believe that such access helps people out of poverty.

The most famous guy from the world of microfinance is Muhammad Yunus, a Bangladeshi banker, economist and Nobel Peace Prize winner.

SKS Microfinance is India’s largest and the world’s fastest growing microfinance organization. Operating in 19 states, it provides collateral-free loans to the poor. 85% of its borrowers are poor women. It made loans worth Rs 20,000+ crores last year. It provides loans for cell phones, local retail shops, housing loans (via a tie up with HDFC) and life insurance (via a tie up with Bajaj Allianz).

So where does SKS gets the money to lend? From other banks and financial institutions. Also from private equity investors and venture capitalists. Like Sequoia Capital (who have funded companies like Google) and Narayan Murthy.

Impressively, SKS has been able to create a for-profit model of microfinance. Its repayment rate for these unsecured loans is well over 99%!

SKS came up with an IPO recently. It is ongoing as we speak. The issue, if successful, will raise Rs 1,400 crores (at least). Money for future lending as well as to provide a way for some of its investors to cash out.

The IPO has invited criticism of the most ridiculous kind. “Is it correct to make millionaires out of shareholders when your borrowers are so poor?" asks Olivia Donnelly, executive director of UK-based Shivia Microfinance. Huh? To help the poor, one has to be poor? How does a poor person lift others out of poverty?

Conveniently forgotten is the fact that banks will rarely lend to the kind of poor people that SKS lends to. Apparently, SKS elevating some people out of poverty is not virtuous enough. Their employees and founders must remain poor as well.

I am curious how the critics want successful microlenders like SKS to scale up? To get more people out of poverty? If they don’t come with an IPO, how will the venture capitalists get their returns? And if there can be no IPO, why would venture capitalists lend to the next microfinance institution that needs money?

To the critics, it’s OK for SKS to pull people out of poverty but not to get rich itself! Talk about irony.

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