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Friday, November 5, 2010

MFI's: Where do we draw the bottom line?

Recently, I have been reading a lot about the issues that for-profit MFI’s have caused in the developing world, mainly in India. I am left with so many questions that involve both moral and commercial intuition:

If an MFI is built on a for-profit structure, how much is too much profit? Does the government have the right to draw the line on interest rates, or are free markets a better solution to allow for massive scaling of micro-credit? How can we find that balance between reasonable profit for the MFI’s and reasonable interest rates for the individuals they are trying to help? Can that balance even exist for for-profit MFI’s?

 My last question is the real lingering one for me. It pushes me to think really hard about the good versus the greed of humankind. SKS Microfinance is an Indian MFI that made the switch from a non-profit to a for-profit business model in 2005. They have achieved a scale that took Dr. Muhammad Yunus’s Grameen Bank over thirty years to build. How?

Put simply, a for-profit model requires that investors in the company receive, well of course, profit. This means that there is pressure on the MFI to maintain high interest rates at a level that keeps investors happy. Happy investors lead to the attraction of more investors, which in turn allows the company to give out more loans at a faster rate. Whereas the non-profit MFI model seeks internal growth by investing the borrowers’ payments back into the organization, the for-profit model must fulfill its obligation to its shareholders.

Now here’s the kicker. There have been a growing number of suicides amongst the borrowers of micro-loans from companies like SKS. There is so much pressure on these people that the company has made a reverse impact on so many lives. So while the loans are reaching more than 6 million people living under $1.00 per day, and while SKS’s loan disbursements have grown by 170% in the last year, I cannot help but think about the greed that Muhammad Yunus dreamed of diminishing when he built the Grameen model.

Today, after a meeting with financial services secretary in New Delhi, micro-finance companies agreed to decrease interest from as high as 34% down to 24%. While I hope and believe this change will reduce some of the negative impact already caused to borrowers, I can’t help but feel sad that social businesses require government intervention to improve the social outcome of their stakeholders.

Returning to my lingering question, I do think it’s possible to find that balance between satisfying profit and reasonable interest rate levels. It’s not the business model I am concerned with, but the people who are managing it. A social business has every right to be for-profit on the condition that the triple bottom -line is met in a balanced way. These for-profit MFI’s have a great opportunity to spur growth in the impact investment field. If investors are looking for high returns, the MFI’s have the responsibility to set the appropriate rates that tell these investors to look to the googles and the oil companies of the world. Profit is the driver behind making these MFI’s strategies work, but standards need to be set that identify the difference between reasonable and excessive returns.

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