In a three-part series, Roosevelt Institute Fellow Georgia Levenson Keohane explores India's microcredit crisis and what it teaches us about combating poverty. Today she addresses a burning question: can for-profit microlenders effectively serve the poor?
Yesterday I sketched a remarkably brief history of the microcredit industry as a backdrop to the current credit crisis in South Asia. The bursting bubble there has rattled our faith in microenterprise as a panacea for global poverty, and raises larger questions about how, why, and when we harness profits to serve the poor.
Non-profit vs. for for-profit vs. something else all together
Most observers agree that the credit turmoil in India's Andhra Pradesh region can be explained by the very rapid growth of microfinance there. There is also consensus that the allure of market rate returns attracted the flood of private investment in the first place, vastly accelerating industry expansion -- and risk of collapse. From the early days of microenterprise, concern about commercialization -- whether and how much to harness market forces to provide credit to the poor -- has animated the debates in the field. After all, capital quantity and quality are closely linked.
Grameen Bank founder and Nobel Laureate Muhammad Yunus has long maintained that the profit motive, by definition, compromises the integrity of the microenterprise, since it privileges the needs of investors over the needs of the poor. Yunus launched Grameen in response to what he perceived to be market failure: large commercial banks could not -- and therefore would not -- lend profitably to the very poor. He denounced the IPOs of Compartamos and SKS Microfinance, which both began life as non-profits before seeking increasingly large quantities of outside and private investment. In both cases, the IPOs raised hundreds of millions of dollars of new capital for the microcredit markets, enriching company founders and early investors in the process. According to Yunus, "This is pushing microfinance in the loan sharking direction. It's not mission drift. It's endangering the whole mission."
Yunus distinguishes the Compartamos and SKSs of the world from Grameen, technically a for-profit business, but one in which borrowers are the owners and in which profits are reinvested in the bank. When I asked Yunus last year to elaborate on the distinction, he replied, "I see social business as an opportunity to help people out of poverty, which is different than an opportunity to make money." Perhaps this is why Grameen charges 15% interest, while publicly traded Compartamos' going rate is closer to 100%.
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SKS founder and Chairman Vikram Akula counters Yunus' critique with the contention that sharing profits with private investors is the only path to scale, a prerequisite for reaching the billions of the world's unbanked. In fact, there is truth to both Yunus and Akula's claims, and the trade-offs inherent in their arguments have important implications for policy makers worldwide. It may very well be that for truly micro loans for the very poorest, a non-profit or Grameen-like model works best. However, the structure required to make larger loans might function better as a profit-seeking venture, like Compartamos, albeit a highly regulated one. In other words, there may be no one-size-fits all solution to the form microlending should take. But the benefits and limitations of each approach must be considered in organizational and policy design.
Yunus' disagreements with Akula echo his earlier disputes with C.K. Prahalad, the economist who popularized the Bottom of the Pyramid (BoP) approach to poverty-fighting. According to Prahalad, the billions of people in the world who live on less than two dollars a day represent a prodigious market opportunity as consumers. By selling products and services to this segment, firms can earn profits and serve the needs of the poor. Much to Yunus' chagrin, microcredit is regularly cited as an exemplar of the BoP principle.
The emerging field of "impact investing" draws heavily -- and explicitly -- on this BoP paradigm. Impact investing, a term coined by the Rockefeller Foundation, which has also been the movement's lead architect and funder, seeks to bring private capital to bear on social and environmental problems. According to a December report from JP Morgan (co-sponsored by Rockefeller), investments in businesses that produce social and environmental benefits and financial returns represent as much as a $1 trillion market opportunity, primarily in developing countries in the BoP areas of housing, rural water delivery, maternal health, primary education, and financial services. This last pillar presupposes further expansion of commercialized microfinance. Champions of impact investing would be wise to heed the recent Indian experience and what it tells us about the merits of temperate growth as well as the regulation that must commeasure investment.
Although the "impact investing" spotlight shines brightest on developing countries, interest in the field has begun to percolate in domestic policy circles at the city, state, and federal level. For example, the social impact bond initiative in the UK has inspired the Obama Administration's $100 million pay-for-success pilot and is being closely watched by local governments, including the State of Massachusetts, Newark, and New York City. Even further along in their development are the new hybrid legal forms -- L3Cs, B-corps -- that have emerged to allow social purpose businesses to try to harness and reconcile the benefits of being both mission-driven and profit-seeking.
For all this market enthusiasm, we must be ever mindful of the Yunus-Akula debate: when are market strategies most appropriate? And when do profit pressures compromise the quality of products or service more than we are willing to tolerate? How are some of our very basic institutions affected, whether they are hospitals, colleges, prisons, media outlets, or other systems central to the integrity of our social fabric? I will explore this tension further in blog and book form in the coming year, and welcome your comments.
But first, tomorrow's final post on microcredit: Forget non-profit versus for-profit. Does microenterprise even work? And how do we know?
Georgia Levenson Keohane is a Fellow at the Roosevelt Institute.