To go public or not to go public, that is the question—no, this is not about declaring our relationship status on Facebook.
The Wall Street Journal published an article on SKS Microfinance Ltd., India’s largest microlender, with a portfolio of about $1 billion; in 2009, it issued approximately $5 billion in microloans in India. It boasts seven million clients, a profit growth rate of 200% per year and net non-performing assets to outstanding loans rate of a mere 0.15%.
SKS won the approval of the Securities Exchange Board of India to proceed with an IPO, which would allow it to raise up to $250 million from investors, enabling SKS to expand its services. The debate over private equity-driven microfinance is one that has divided the microfinance industry into two camps: those who believe in profit and those who believe in altruism (or, rather, believe that shareholder demands will cause interest rates to surge).
Vikram Akula, founder and chairman of SKS and former consultant at McKinsey & Co., belongs to the former camp; Muhammad Yunus, Nobel prize-winning founder of Bangladesh’s Grameen Bank, belongs to the latter. In an effort to become independent from government money, foundation grants and charity, Akula applied business concepts to the Yunus model, standardizing training and lending procedures to cut costs, paying employees a decent wage and ensuring enough profit to attract institutional investors.
On the other hand, Yunus opposes the SKS IPO because it deviates from the spirit of genuine microfinance, embracing a role more akin to that of a loan shark. Specifically, Yunus fixes the ceiling for microfinance profits at 15% above an MFI’s cost of capital needs. SKS charges around 18% above its cost of capital needs; however, as Akula emphasizes, although it could raise its interest rates to 40%, its current average is considerably lower, at 28%. Indeed, SKS executives and investment bankers delivered an unorthodox sales pitch, underlining its modest profits. This reflects sensitivity to accusations that SKS is profiteering from charging high interest rates to destitute borrowers.
Usha Rodrigues at the Conglomerate blog contends that the paradoxical nature of the sales pitch reflects a certain naiveté on the part of those who believe that shareholders will forgo making the “maximum possible amount of money.” In contrast to Yunus, Tan Siok Choo, a Malaysian blogger at the Sun Daily, viewed the SKS business model as an alternative to loan sharks and advocated for Malaysian policymakers to study the SKS business model, pronouncing it a “megatrend.”
Gregory Millman at the Don at Dawn blog maintains that the implications of the SKS IPO are far-reaching; India has 35 for-profit MFIs that may or may not follow suit, depending on the success, or failure, of SKS going public. Millman advises SKS to focus on the poor Northern states with less access to microfinance, where it would be less likely to face competitive pressures.
Although SKS is the first Indian MFI to go public, globally, it is preceded by Banco Compartamos, a Mexican microlender that raised $467 million in a 2007 IPO, and PT Bank Rakyat Indonesia, a state-owned Indonesian microlender that raised $480 million in a 2003 IPO. Banco Compartamos has been criticized for profiteering from the poor, sometimes charging interest rates as high as 80%.
In response to critics, Akula stated that a majority of SKS’s investors will be committed to the lower-profit model. Furthermore, he argues that the “superprofits” of microfinance—SKS’s ROI is expected to be eight times the original investment—ensure that employees enjoy benefits closer to those in the conventional finance world, which is a part of his business strategy. Let’s hope that “superprofits” will not lead shareholders to avarice, because, after all, “poverty wants much, but avarice, everything.”