Thursday, August 19, 2010

SKS Microfinance offers another wrinkle to microcredit debate

India's biggest microcredit lender made an initial offering of stock earlier this week. This move proved very profitable for SKS Microfinance, but very controversial for the many involved in microcredit. Some say that such a stock offering only profits the company at the expense of the poor. The other side of the debate says that such offering of stock helps to raise more money for even more loans to the poor.

From Fortune Magazine at CNN Money, writer Nin-Hai Tseng explains the debate further.

An IPO is a rare and controversial step for a major microfinance company to take, since these lenders typically rely on donations, governments and international organizations such as the World Bank for funding. Only a handful have raised public money on the idea that helping small entrepreneurs like farmers and basket weavers gain access to financing is not only the right thing to do, but also a profitable venture.

But after SKS's strong reception, others will likely follow its lead to the public market. SKS founder Vikram Akula says going public is perhaps the only way to shore up more capital to serve more of India's poor. He wants to prove critics wrong, including Yunus, who argues an IPO would essentially mean profiting off the poor. The Bangladeshi banker and economist has been credited for pioneering microfinance, and in 2006, his founding of Bangladesh's Grameen Bank earned him and the bank a Nobel Peace Prize.

The industry faces a sticky dilemma: to pursue morals or profits. But public microlenders argue they can have both. By getting stockholders involved, SKS raises more capital, which leads to more loans for India's poor. And more loans could eventually drive down interest rates charged to poor borrowers.

But somewhere, the economics of scale gets lost. These are high-risk borrowers. They have few, if any, assets to use as collateral. Some might own land, but don't always have titles proving this. It's hard to see how interest rates could fall much, if at all. Indeed, the pressure of answering to public shareholders could have the opposite effect, leading to higher rates for borrowers.

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