Smit Gade a student at IGIDR sends me this interesting debate between Mohd Yunus and Vikram Akula (via Megha Bahree‘s Blog).
Here is the entire discussion:
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.
As microfinance became popular (I kind of blame Nobel Peace Prize committee for making it so popular) and people realised so much money is at stake, it was just a matter of time and one could see such debates coming.
I somehow see very similar movement in microfinance sector as one saw in finance sector. People realised around 1980s (some might change the period but that doesn’t matter) that so much money could be made that soon basics of finance were forgotten. All kinds of jazz was generated and fancy explanations were given to people and in the background a lot of money was being made. And then you had a crisis like this and people realised all was not well. So again as Mohd Yunus says the problem is not with profits but with how much and the way it being made.
I mean unless this crisis happened it was all ok. But you clearly need to see the dangers now. One keeps reading about various financial innovations in microfinance sector. And again just like you see Mohd Yunus reacting to all this glamour about microfinance we have likes of Volcker wondering what all this financial innovation talk is all about? How can we be certain that all is being done well?
It is like the gold rush now and you keep hearing about other microfinance companies also tapping the capital market. The great response to SKS Microfinance IPO has ushered many more to join the rush.
I hope all goes well but going by past historical experiences, I am just being too optimistic. Akula and other well-wishers need to be concerned.