Tuesday, October 19, 2010

Can the Profit Motive Improve Microfinance?

Dear Colleagues

In my view, the idea that the profit motive will improve microfinance is patently absurd ... but the idea is gaining traction because bankers and the financial community have discovered a new asset class to exploit.

I do not question the fact that more money can improve the microfinance sector simply by enabling it to expand ... but making microfinance bankable and suited to profit seeking investment most likely means that the real value of microfinance ... the education and training and mentoring that has nothing to do with profit but everything to do with quality of life and perhaps progress out of poverty ... is at extreme risk.

The economic elite that inhabit the higher reaches of the financial and banking sector have little or no idea of risk ... whether it is to do with their own institutions, or more seriously at the individual and family level. Building another financial pyramid on top of the very poor is a bad idea ... maybe even a crime against humanity in the making! I realize these are strong words, but this is really what is at stake.

I hope to attend an upcoming dialog in New York between Alex Counts and Vikram Akula who are potentially on very different sides of the argument. My expectation is that Vikram Akula, who is the CEO of SKS that has recently done a very successful IPO in India, will make the case that profit does not mean losing the value or microfinance ... and access to funding is way more important for the microfinance industry as a whole. Alex Counts, head of the Grameen Foundation in the USA and closely associated with Muhammad Yunus and the Grameen Bank movement is likely to argue that the value of microfinance comes from a range of activities that have high costs but deliver high social benefit but make a microfinance organization seem to be inefficient.

My position is that without strong metrics about value performance as well as money performance, nobody will ever know what is going on until it is too late. The amount of money profit earned in the run-up to the sub-prime mortgage fisco and the subsequent financial implosion of the banks ought to have taught us something ... but people have short memories especially when memory is inconvenient!

This is the abridged notice of the meeting that I just received.
Can the Profit Motive Improve Microfinance?

Asia Society, Schwab Foundation, and WAM-NY, are pleased to invite you to a debate on whether the profit motive can improve microfinance.

SKS, the largest microfinance company in India, successfully went public this summer, becoming the second such business to do so. Is the creation of a large, publicly owned and profit-making enterprise the best-or the only-way to take the benefits of microfinance to the millions of poor people who really need it? Are such businesses more or less likely to maximize public good by giving vital and affordable financial services to those currently living outside the retail banking system?

In his new book, A Fistful of Rice: My Unexpected Quest to End Poverty Through Profitability, SKS chairperson and founder, Vikram Akula, has written a powerful brief answering this question in the affirmative. Microfinance pioneer, Nobel Prize laureate and founder of Grameen Bank Muhammad Yunus, disagrees, as does Alex Counts, President and CEO of Grameen Foundation, and author of Small Loans, Big Dreams: How Nobel Prize Winner Muhammad Yunus and Microfinance are Changing the World.

Join Alex Counts and Vikram Akula as they debate whether public companies and a forprofit approach are the best ways to take microlending affordably to scale. The debate will be moderated by Niki Armacost, Co-Founder, Arc Finance.
This has the potential to be an interesting debate!

Peter Burgess

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