Yesterday, I started off my MBA elective course on Social Entrepreneurship with a discussion of Grameen Bank and microfinance. I've taught this material for over 10 years, but this week it had an interesting twist. From the recent events in Andhra Pradesh in India, to highly-publicized criticisms of Mohammed Yunus, the Nobel-Prize winning founder of Grameen, to his being sued for libel, writing an editorial in the NY Times last week, and being released two days ago on bail, we had a lot of new layers to discuss, some political and some structural. Still, David Bornstein's inspiring story of one man figuring out how to use credit to give poor people the power to lift themselves out of poverty does not disappoint.
Most interesting to me: is the commercialization of microfinance a good thing or a bad thing? Should there be a limit on how much profit investors can reap as returns from lending to the poor? The typical interest rate at Grameen has been 20%, and some microfinance institutions (MFIs) who have recently IPO'd have rates as high as 45%. As these newly commercialized MFIs scale, where do these big profits come from? Either economies of scale in operations (lending more for less cost, e.g., by getting money at a lower cost of capital, or having administrative systems that can handle billions as well as thousands of loans), or in higher interest rates. Is the latter morally acceptable? If not, what do you do about it? And it appears that many of those MFIs who are the most profitable have also cut down on educational services that are costly but are also proven by nearly all the research literature (see Marc Epstein's fabulous chapter in the recent CASE book, Scaling Social Impact) to be the deciding factor in microfinance's ability to truly impact borrowers' economic well-being.
The issue, I predict, will be one that will rear up again as field of impact investing grows: how much profit is morally acceptable for investors/owners to keep? To be sure, it's these investors who are taking the biggest risks, putting up the initial funds to create bottom of the pyramid marketplaces that scale solutions to poverty, agriculture, health, energy and education. But will other communities, like Andhra Pradesh, realize that this means that while a little money comes in at first, a great deal more goes out? Will impact investing by multinationals or developed world investors be seen as the new colonialism? I think we're just getting a taste of what's to come. Some backlash, and perhaps some very worthy discussions about how best to balance local control and impact with the power of markets.
Yunus, of course, has been preaching for years that ownership, especially by the target beneficiaries themselves (Grameen is nearly 97% owned by its borrowers today, and that is under recent threat as well, according to Nicholas Kristof), is the key to for-profit social business ventures being morally acceptable. But I fear we're so far away from that path and model in the capital markets today that it's an argument that actually hinders the necessary discussion on this point. We're going to have investors, we're going to use markets to scale solutions - what are the guideposts to doing it fairly as well as effectively?
Yunus is pressing for regulation, and this morning, I learned through my twitter feeds that there are some new regulations pending in India. Some seem reasonable, like checking the credit history of your borrowers so they are not caught in an endless cycle of multiple loans from different lenders, others seem as if they will take a while to shake out, like capping the spread between the rate of capital and the interest rate charged to borrowers.
We ended with a quick discussion of Kiva, its business model and its role in the larger ecosytem of microfinance. Through my students' insightful comments, we realized that Kiva's largest social value may be in creating access for MFIs to larger pools of capital, without interfering with the ownership or financial structure of those MFIs. Kiva, as we've discovered at CASE in our explorations of various business models used by social entrepreneurs, is unique as a fee-less broker of microfinance. Most brokers take fees. Kiva doesn't. They connect hundreds of thousands of lenders, investing in increments of as little as $25, to MFIs, allowing the MFIs to scale their lending pools without any of the tensions we'd been discussing during the whole class session about who needs to get paid back or where that intermediary's fee shakes out in terms of its effect on the ultimate interest rate charged to the borrower. It was a new insight for me.
One of my favorite posts recently on this:
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