Friday, April 09, 2010

Microcredit stock offering begins debate on profits

An initial public offering of stock from a microcredit bank in India has opened up the debate on investing on the poor. Some say that the huge amounts of cash being put into some of the for-profit microcredit banks do not really benefit the poor. While the people who run these banks say the money is necessary to continue doing their work.

From Reuters, writer Rina Chandran gives us both sides of the debate.

"The job of microfinance is to alleviate poverty, so the question to ask is: who's going to benefit from the IPO?" said Olivia Donnelly, executive director of UK-based Shivia Microfinance, a non-profit firm that focuses on India and Nepal.

"It's OK to do an IPO because you need to scale up, or upgrade your IT systems, but is it correct to make millionaires out of shareholders when your borrowers are so poor?"

Microfinance has been around since the 1970s, but jumped into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh's Muhammad Yunus and his Grameen Bank, which pioneered giving tiny unsecured loans to the poor to buy cows or sewing machines.

Some Indian MFIs including SKS have switched to a for-profit model and registered as non-banking financial corporations.

MFIs' expanding client base and near-zero defaults have drawn investors ranging from Singapore's Temasek, CLSA Capital and International Financial Corp to private equity firms Sandstone Capital, Unitus and Matrix, which have put money in SKS, Share Microfin, Spandana, Ujjivan and other MFIs.

Advocates say rapid growth and the drying up of traditional sources of capital have driven MFIs to consider other options.

"When we are growing 75 percent year-on-year, the sort of equity we need to maintain 15 percent capital adequacy ratio cannot come from old-fashioned sources such as philanthropists or banks," said Vijay Mahajan, president of lobby group MFI Network.

"So we've had to move to new sources like PE, the capital market and debt instruments. This is something to be celebrated."

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