Microfinance backlash: Identity crisis, evolution or greedy mission creep?

Seattle is big on microfinance, but what is it?

The short answer is that microfinance is a set of financial services such as small loans for the poor aimed at helping people get themselves out of poverty.

Sounds fairly straightforward, right? In reality, there’s a fight for the soul of microfinance going on and some of that battle has been playing out here at home.

There has been an explosion of “profit-maximizing” microfinance organizations lately which some say threatens to undermine the credibility of this anti-poverty scheme — if not its fundamental social purpose. But the proponents of profit-driven, commercial microfinance say it is the only way to really grow these services, to reach the many millions more in need of help.

Flickr, TW Collins

As would be expected in the midst of such a struggle, there’s been a bit of conflict, drama and confusion surrounding microfinance lately, such as:

  • The abrupt closure and mysterious reorganization of the Seattle-based for-profit microfinance firm Unitus. The organization laid off its staff several months ago with little explanation and stopped communicating with its donors after coming into some big-time profits (initially estimated at about $70 million) for its investors.
  • More recently, the police actions taken against India’s biggest microfinance organization SKS. The company, which had earlier changed from non-profit to for-profit and then went public with an IPO this summer, provided Unitus (which in 2006 had created an equity fund that invested in SKS) with its big financial windfall.

The founder of SKS, Vikram Akula, started out in the “social business” tradition of his mentor Nobel Laureate Muhammad Yunus. But he has since become an advocate of commercial and profit-driven microfinance.

Yesterday, Akula was supposed to appear in person at another debate on the topic of profit-driven microfinance, at an event in New York City sponsored by the Asia Society. He instead had to do it from India by videoconference. The moderator only said he was “detained” — not that he was facing possible arrest due to allegations of SKS lenders strong-arming poor people to the point of inciting suicides.

The allegations may turn out to be untrue and it seems unlikely Akula will actually be arrested. But at least you can’t say microfinance is just another one of those boring, bleeding heart, do-gooder activities.

Seattle is home to a number of organizations active in microfinance. Yunus frequently visits here and there are often events on this topic. Later this week in fact, at Seattle University, there will be a public forum in which experts discuss the “social performance” of microcredit loans.

So I decided to put the question “What is microfinance?” to three local (well, one is quasi-local) leaders in this movement: Rick Beckett, president of Global Partnerships, Ed Bland, outgoing president of Unitus, and Alex Counts, president of the Grameen Foundation.

Note: The Grameen Foundation has offices in both D.C. and Seattle. Counts was the one who debated Akula by video yesterday (which you can watch here).

All of these organizations have done a lot to expand microfinance worldwide, but in different ways. In a nutshell, Global Partnerships and the Grameen Foundation do it as non-profits and Unitus is (or was anyway) doing it as a for-profit entity.

That’s the first difference, but it isn’t necessarily the most important one.

Rick Beckett, CEO Global Partnerships
Global Partnerships

Beckett, who worked for years as a financial analyst in health care, notes that being non-profit doesn’t necessarily mean an organization is socially motivated. Lots of health care organizations are non-profit and yet many of them, he says, are often primarily focused on making money.

“I don’t think it’s useful for people to think of non-profit as good and for-profit as bad,” said Beckett.

Yunus’ pioneering Grameen Bank in Bangladesh, he noted, operates as a for-profit bank but with a clear anti-poverty mission, community ownership and social purpose.

For Beckett, the distinguishing feature of microfinance is that it clearly serves a “social purpose” above and beyond merely managing loans.

Global Partnerships, for example, works in Nicaragua with a local microfinance organization called Pro Mujer. They combine giving out loans to poor women with providing them access to health and educational services. The loans help them financially, Beckett said, but it is the combination of financial, social and health programs that really makes the difference.

“That doesn’t give any return to an investor, may even reduce the financial return, but it has a social return,” Beckett says. People who donate to Global Partnerships may (and did recently) see a return on their investment, he says, but that’s secondary.

Alex Counts, CEO Grameen Foundation
Grameen Foundation

Counts agrees that what distinguishes microfinance from other forms of financial services is its social focus. The problem, Counts says, is that SKS can claim to be serving a social purpose — getting loans to poor people — even as it is also trying to also make a lot of money for its shareholders.

“I think SKS has veered pretty heavily toward profit-maximizing and it has compromised its claim to be serving a social purpose,” Counts says. But that’s just his opinion, he says, and Akula clearly disagrees with him.

To try to bring some clarity and definition to the field, Counts said the Grameen Foundation is working with a number of other organizations to develop an industry standard for measuring social impact.

But until the industry adopts a standard for assessing social purpose, Counts says one way for the public or donors to tell the difference is that socially motivated microfinance organizations tend to impose reasonable limits on executive compensations, caps on what investors can make and so on. And like the Global Partnerships example, he says, most of the financial programs tend to be accompanied by other services such as health and education.

“The difference is between doing microfinance for a social purpose, in which you can do at a profit but the main purpose is social, or doing microfinance mostly aimed at maximizing profit with the expectation, but no requirement, of a social benefit,” says Counts.

Ed Bland, outgoing CEO Unitus
Unitus

Bland, outgoing president of Unitus, said he agreed that there needs to be some way to measure social impact in microfinance — how many clients actually get out of poverty, educational and health improvements. But ultimately, Bland says, microfinance is still mostly about getting money into the hands of poor people.

“Many microfinance institutions struggle because they are so small, they have no economies of scale and often run out of money,” he said.

Unitus’ goal was to accelerate the growth of these microfinance organizations, increase their stability and get more money out to poor people.

“The product here is money,” Bland says, and the best way to increase the pool of money is through the more aggressive, commercial approach taken by SKS.

“You have to be careful not to get too greedy and take resources away from the poor, but we think it is okay for investors to get a return,” Bland says. This approach increases the resources available to do loans.

Another way to differentiate a responsible microfinance institution from an exploitative one, says Bland, is to look at their loan interest rates. SKS charges somewhere around 25 percent, he noted, while the controversial Mexican microfinance company Banco Compartamos charges something like 85 percent on loans.

“You can tell if an interest rate is reasonable or not,” he says. “We think you can do this as a for-profit operation, give investors a reasonable return and serve a social purpose.”

Bland said he didn’t want to get into much detail regarding Unitus’ financial windfall from the SKS IPO and the reorganization. At the end of this month, he said he will leave Unitus and issue a letter describing the organization’s financial condition, how the money that came in was distributed and where the organization goes from here.

“Any of the funds that come back to Unitus will be directed to the benefit of the poor and not to individuals,” Bland says. “That remains a strong commitment of our board.”

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Tom Paulson

Tom Paulson is founder and lead journalist at Humanosphere. Prior to operating this online news site, he reported on science,  medicine, health policy, aid and development for the Seattle Post-Intelligencer. Contact him at tom[at]humanosphere.org or follow him on Twitter @tompaulson.