Student Publication: Microfinance Institutions and The Dilemma of Initial Public Offers

Tochukwu Obi Akunyili, a Brandt School student from Nigeria, published the following article on microfinance institutions and the dilemma of initial public offers. The author holds a degree in philosophy and has worked in the field of political communication and public relations. An abiding area of interest for him is researching how Africa should make the most of developmental trends from utilization of the myriad opportunities availed by globalization.

Abstract

The article contends that the recent outing of microfinance institutions in the capital markets
contrasts with the social missions of the companies. The author argues that the risks to which the
poor are exposed by such IPOs necessitate policy measures that should protect the interest of the
poor.

Microfinance Institutions and The Dilemma of Initial Public Offers

by: Tochukwu Obi Akunyili

Microfinance, which became popular as a successful means of bringing the very poor out of
poverty, disease and hunger is undergoing a fundamental challenge. Defying the morally faultless
model established by Mohammed Yunus, the Nobel-winning father of modern microfinance, some
microfinance institutions have tried to radicalize microfinance by sourcing funds in the capital
markets. This step has brought on a debate on how social entrepreneurs should balance social
missions with other interests.

The phenomenon of poverty and the means of its alleviation have confounded development experts
for decades. A lot of global manpower has been expiated in the fight against poverty since the
creation of the Breton Woods institutions, yet, the World Bank estimates that 1.2 billion people
subsist on less than $1.25 a day. Microfinance was developed as a veritable tool in the global
fight against poverty, disease and hunger. It works on the principle that the provision of financial
resources to persons, especially women, who are too poor to receive the services of the orthodox
financial establishments, can help such persons out of poverty. Professor Mohammed Yunus, 72, of
the Grameen bank of Bangladesh describes microfinance similarly. It is, he says, lending money to
the poorest women for income generating activity, without collateral, so they can help themselves
out of poverty. The core of Yunus’ belief is that microfinance is a social enterprise with a precise goal
which is not just to make the poor become self-sufficient but equally and as importantly, to help the
poor retain their money.

This idea can be seen clearly in the ownership structure of the Grameen bank which Yunus founded.
The story of the establishment of the bank goes back to 1976 when Yunus advanced the first loans
from his pocket to a group of poor rural Bangladeshi women. The project underwent a gestation
phase between 1976 and 1982. In 1983, the project was formalized into a bank. In this capacity,
the Grameen bank could take loans and accept deposits just as it can make loans to its women
borrowers and also make profits. To borrow money from the Grameen bank, a borrower has first to
own at least a share of the bank. So practically, Grameen bank lends money only to its shareholders
who at the end of each fiscal year divide their profit. Mr Yunus holds no shares in the bank.

The pilgrimage of microfinance institutions to the capital markets in quest of financial resources
began with the Banco Compartamos of Mexico in 2007, in 2011 SKS of India followed suit. The SKS
Microfinance of India is interesting as a case study for a number of reasons: first, is the magnitude

of the debate it initiated; second, is the sheer size of the microfinance sector in India – India has
the world’s largest number of people living on less than $1.25 per day; third, is the geographical
proximity and to an extent cultural similarity of India and Bangladesh which is the home of the
successful Grameen Bank; fourth and lastly is the scandals that trailed the SKS after its IPO which
culminated in the resignation of Mr Vikram Akula, as the executive chairman of the company.

Mr Vikram Akula, 44, an ex-McKinsey consultant established SKS Microfinance in 1997. In 2011, the
Non-Banking Financial Company (NBFC) sold its shares in an oversubscribed initial public offering
(IPO) on the Bombay stock exchange. With this step, it became a publicly owned company whose
prime mandate is to maximise profits for its shareholders. Thus, SKS took on the delicate task of
balancing its social responsibilities to its poor clients and making profits for the better off who could
afford to acquire its financial portfolios.

The morality of an IPO for a microfinance institution, in other words, a social enterprise which
was originally established to serve the poor and help them retain their money has since been a
contentious issue. In a 2010 debate at the Clinton Global Initiative, between Mohammed Yunus
and Vikram Akula, both entrepreneurs explained their positions and motivations. Vikram Akula
explains that the Grameen model is not replicable and that microfinance and indeed, the alleviation
of poverty should be done with haste. Accessing the capital market he argues is the only avenue
through which social entrepreneurs can realize the quantum of funds needed to alleviate global
poverty. To this he adds that SKS has integrated new functionalities into the model of the Grameen
bank – in Schumpeterian fashion. Such progressive disposition he hopes will benefit the world’s
poor and abate global poverty. Prof Yunus on the other hand argues that bringing in money from the
capital markets gives the unpalatable idea that there’s an exciting chance of reaping profit from the
poor. He argues that counterbalancing loyalty to the poor and loyalty to the rich rests on a fragile
pendulum that will ultimately tip in favour of the rich.

Months after this debate, SKS and other microfinance institutions operating in the state of
Andra Pradesh in India became mired in a series of controversies. SKS featured largely in these
controversies. The issues ranged around forceful collection of loans leading to communal goading of
defaulting borrowers. This culminated in some 200 suicides and some rush-hour government policies
designed to save the poor from loan sharks. Mr Akula, who had until then been the embodiment
of what SKS believes and represents became estranged with the management of SKS and resigned.
Intra company studies found out that SKS had overlooked its basic lending principles shortly before
the IPO in a quest to diversify its client base, obviously to make the company more attractive to
investors. The company shifted its emphasis from sustainability of its loan portfolios which meant
better training of clients and follow-up visits to ensure those loans were put to productive use to
rapid disbursement of funds. This as can be imagined led to a breakdown in the cycle.

Conclusion

Issues of this nature evoke policy challenges. This is especially so because those clients of
microfinance institutions are predominantly women who are very poor. The Indian debacle should
serve as a warning to policymakers all over the world on the need to bring both the borrower and
the financer to the drawing board. These policy recommendations cannot be more pertinent.

Microfinance institutions should have a built-in strategy for loan recovery and cushioning of
the shame and burden that loan defaulters face. Governments should mandate microfinance
institutions to avail seminars on investment strategies to their clients. Such programs can be a part
of their corporate social responsibility (CSR). Also, prospective clients should satisfy well-defined
benchmarks before loans are made to them.

States and local governments where microfinance institutions operate should sensitize their citizens
to avoid multiple loan taking. This can be done in conjunction with the microfinance institutions.
The borrowers should be made aware that such practice can lead them to a spiral of debt and
to the temptation of taking one loan to offset the other. This should complement the availing of
investment seminars. Clients should be made aware that the idea of borrowing is to engage in
productive enterprises – not to borrow from multiple lenders.

States should enact policies that protect poor women borrowers from societal goading and
harassment by loan collection officers. This is necessary to curtail overzealous loan agents from
driving borrowers who cannot repay to self-destruct. This issue calls for a delicate handling. Moral
hazard if introduced can only make matters worse both for the microcredit providers and their
pauperized clients.

Finally, these policy recommendations are timely because while in classical economic terms,
markets allocate resources equally, in reality markets do not do a good job of weighing individual
weaknesses, creating equal access to public goods and attenuating the possibility of harms. These
are issues the social entrepreneur considers and responds to. So in a way, the microfinancer may be
seen as the antithesis of Adam Smith’s invisible hand. The microfinancer should not just make loans
to poor women but should provide services that will enable them to benefit the most out of their
investments.

A version of the article can be found at: http://www.fairobserver.com/article/microfinance-and-dilemma-ipos 

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