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The Indian Debate Over Profit From Microfinancing Continues

The Indian Debate Over Profit From Microfinancing Continues

Reporter ,  22-Oct-10


Few companies or industries ever manage to show a strong tie-in between making profits and social responsibility. Most times, the former and the latter are diametrically opposed to each other, where one is about earning and the other about giving away. Microfinace is one such sector that faces this question increasingly.

Microfinance is primarily a mission to provide funds to minor borrowers interested in setting up small businesses. The concept was pioneered by Economics Nobel Prize winner Muhammad Yunus in Bangladesh, where small loans were given out to basket weavers for them to use in their business. In india, SKS Microfinance is focused on this particular segment, and recently went IPO successfully, and has been the subject of criticism for the same.

According to the Nobel Laureate, microfinancing is about social commitment. When you launch an IPO, you are telling investors that there is an oppportunity to profit from lending to the poor, and it can take on an adverse image. The credit when given for profit will only wind up going to the rich, not to the poor for whom it is meant, since the company has to keep an eye on the bottomline.

SKS was set up as being a social enterprise, a company that did well by doing good unto others. However, the IPO has left many of its believers disenchanted, with board members Gurcharan Das, Anu Aga and Narayan Ramchandran of Morgan Stanley quitting just days before the IPO prospectus was released. The company founder Vikram Akula is quick to point out that the IPO gave SKS access to more funds which could be used for greater good. Otherwise, the impact of SKS would have been limited, he claims.

Akula has the right kind of credentials to make SKs a success. A social worker for two decades, he set up SKS as a non-profit in 1997, joined Mckinsey and Co. in 2004 as a consultant and returned to SKS in 2005, when he changed the company to a for-profit. Akula estimates that poor households in India need close to US$50 billion in credit, only 10% to 15% of which has been met by all MFIs combined because of lack of access to capital.

The recent termination of the company’s CEO created adverse publicity for SKS, but Akula is lining up to come back as executive chairman, and this could be the cause of the power struggle within the company. Since money-grubbing is seen as socially unacceptable, a fight in SKS over money and power would be the worst possible scenario for the company to present to its investors and the public alike.

Taking a profit-oriented approach in a social cause is always risky, though many have been talking of sustainable social development. The recent happenings at SKS only serve to show how far we have yet to go.


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