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Ironies in Yunus Attack on SKS IPO
July 29, 2010
First, an apology: I’ve been silent without explanation these last few weeks. I’ve been diverted this summer from microcredit to macrocredit as I write a retrospective on the Jubilee 2000 debt cancellation movement. The deadline has felt tight enough to squeeze out blogging (though I hope to change that soon, and will let you know) and, as a further cause of hesitation, I have been unsure about whether to post here or on CGD’s main blog.
The back and forth about the initial public offering (IPO) of SKS Microfinance just provoked me to return to this feed. As he has in the past, Muhammad Yunus has lambasted the for-profit commercialization of microfinance:
“This is pushing microfinance in the loansharking direction,” Muhammad Yunus, who was awarded the Nobel Peace Prize for his work at established microfinance lender Grameen Bank, told The Associated Press. ”It’s not mission drift. It’s endangering the whole mission.
”By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me,” he said. ”Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people.”
…
As SKS has grown and attracted more commercial funding, its borrowers have seen their ownership stake fall from 40 percent to 11 percent of the company, post-IPO.Grameen Bank, in contrast, is wholly owned by its borrowers.
Grameen’s Yunus says there is a more equitable way to grow: turn to the poor for financing.
Grameen funds its loans by taking deposits—a practice Indian regulators don’t allow.”The whole thing is to allow microfinance institutions to take deposits. It is a legal question. If you amend the law—which was done for us—you take money and lend it to poor people,” Yunus said. ”There is plenty of money in the villages.”
Understand: I haven’t studied the SKS IPO enough to defend it with ardor. But I can’t help noting the ironies in Professor Yunus’s comments:
- When I interviewed SKS founder Vikram Akula in 2006, he expressed frustration with Indian authorities such as the Reserve Bank of India for prohibiting Non-Banking Financial Companies (NBFCs) like his from taking savings. In this sense, Vikram agrees with Yunus and the turn to outside investors is not by choice.
- Savings deposits cannot substitute for risk-absorbing, profit-claiming equity capital of the sort SKS has just raised. It is muddled to compare them in this way. In fact, the real substitute for savings at SKS and other fast-growing Indian microfinance institutions has been loans taken from commercial banks, which are propelled by India’s priority sector lending requirements (somewhat analogous to the Community Reinvestment Act in the U.S.). And whether a microcredit portfolio is funded with deposits or bank loans, the lender still needs equity to absorb the losses on the bad loans it makes. If SKS took no equity, every rupee of loss on its microloans would have to come from its creditors or its depositors, which would not be tenable.
- As much as I advocate microsavings, I can imagine why the Reserve Bank of India might not find the Grameen Bank’s experience with savings-taking very reassuring. The popular Grameen Pension Scheme promises 12%/year interest on deposits steadily paid in over ten years (or 10% over 5 years); those rates have helped Grameen attract billions of taka, so that it now does more microsavings than microcredit. But especially now that commercial interest rates have dropped in Bangladesh, it is not entirely clear that the Bank can keep the 12% promise. The need for a high return on its deposits may be driving Grameen to expand lending in an unsafe way. If the lending growth overshoots, who will protect Grameen’s savers?
- Even if Grameen is handling its deposits with all appropriate care, as I noted in May, its capital cushion is by all appearances now illegally thin compared to the size of its lending portfolio. Seemingly, it needs to either cut back lending, which it has not done, or…it needs to raise capital. While Grameen members formally own the Grameen Bank, I think they have not been a major source of capital; most has come from donors and accumulated profits. Are the poor of Bangladesh ready to buy shares in the Grameen Bank? Grameen could require clients to buy shares to get new loans, as it does on a small scale as a condition of membership. But that seems unethical. I shouldn’t have to buy shares of Citi to borrow from it. Perhaps the Grameen Bank and Indian microlenders can raise the capital they need from their clients on a voluntary basis. Since that is not a certainty, is it so unreasonable to consider the capital markets? [Update: I retract the "unethical" comment. Bangladeshis who don't want to buy shares when they borrow and save can patronize other microfinance institutions.]
18 Comments on “Ironies in Yunus Attack on SKS IPO”
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July 29th, 2010 at 12:47 pm
Yunus’ rigidity on the issue of profits versus social progress continues to surprise and slightly disturb me, especially considering the Grameenphone experience. He opposed the Grameenphone IPO for the same reasons as above ( http://money.cnn.com/2006/12/0...../index.htm ), yet his original partner on the project, Iqbal Quadir, has a COMPLETELY different perspective on profits and social progress. For Quadir, putting social progress ahead of profit is akin to putting the cart before the horse: http://whatmatters.mckinseydig.....l-progress
July 30th, 2010 at 1:06 pm
The micro finance industry in India currently is largely funded by commercial loans thus leading to a high cost of capital. Private equity demands a minimum ROI failing which it will fail to attract investors.
Access to low-cost capital is crucial for the growth of the sector and taking deposits from clients will not necessarily meet the scale of funding that the sector currently needs. Moreover, there is a trade-off between providing good returns to clients on deposits and getting access to low-cost funds which would ideally reflect in lower interest rates.
August 2nd, 2010 at 10:50 am
It’s important to find the middle ground amidst all this debate, because in his defense, Mr. Akula states the kind of money SKS needs to serve its clients, which come from far and wide, can only be raised through an IPO, and that makes sense.
Read: http://developeconomies.com/?p=1460
However, the moderation Prof. Yunus advocates can be instilled in public companies as well, because he too believes that profit motivation and social orientation go hand in hand (this was expressed in his first book, Banker to the Poor). The trick is to develop policies and an organizational culture that focuses on parsimony, so both clients and investors get what they want.
August 2nd, 2010 at 3:08 pm
As Bill Clinton said on a charlie rose interview, bangladeshi microcredit system design has provided a new developing economy paradigm- one without compare in its efficiency on the goal of ending poverty. From one statistician to another I would have thought that in analysing systems one starts with question what rules of the system can’t be changed without spinning wholly new game. Ownership is one such rule if you want microcredit to end poverty. In effect both BRAC and Grameen offered poor people in the emerging new nation of Bangladesh a non-political entrepreneurship party (privatisation of essential services) that post colonial govs don’t do well.
August 3rd, 2010 at 4:15 am
Ironic or not, microfinance now looks ever more like a niche in the for-profit banking industry and less like the pro-poor social innovation it began as. Perhaps the old adage of social enterprise “doing well by doing good” needs updating: “getting filthy rich by doing good…maybe” When microfinance practitioners bought into the hubris that every poor person needs a loan, they stepped onto a dangerous path. The only way to fund such a massive scale-up was to access to capital markets. So, microfinance, the miracle of social innovation that solved the incentives problems that made the poor unbankable, shifted its attention to the incentives of investors, and profit replaced poverty alleviation as the critical success indicator.
Once this happened, a cascade of changes followed, and MFIs shifted from serving the poorest of the poor to the moderately poor, from serving the rural poor with no access to financial services to serving the urban poor, from starting new businesses to growing established businesses, from peer lending to individual collateralized lending, away from providing auxiliary services like literacy, health, and even business training, and finally from making the poor the primary beneficiary to making the investor the primary beneficiary.
While more and more impact studies conclude without rejecting the null hypothesis on this new breed of MFIs, their investors and founders are raking in huge profits. Microfinance has lost its first love; its turned on them and devoured them.
http://stayingfortea.org/2010/.....rofinance/
August 3rd, 2010 at 9:31 am
The problem with this discussion is that it conflates many different types of interaction under the single term of “microfinance.” There is a big difference between a client-owned bank where clients meet in mutually accountable groups and commit to implementing a set of health- and wellness-related practices in their own lives and a for-profit bank giving small loans and saying, “Come back in a year and pay us back if you can.” But those doing the “impact assessment” conflate these and fail to see the important distinctions between them.
So Aaron, it’s not that “microfinance has lost its first love; it’s turned on them and devoured them.” It’s actually that Muhammad Yunus – with a new, socially constructive model – showed that poor people were credit-worthy, and then a lot of other people – eager for profits – said to themselves, well here’s a great opportunity. But the models are still very different and should be considered (and measured) separately. A small loan delivered to your door does not a microfinance program make (at least in the way Prof. Yunus uses the term).
With all due respect for David and his colleagues, CGD’s greatest vulnerability is its inability to distinguish along important dimensions of difference within the broad categories of “aid delivery” mechanisms it seeks to measure. In its quest for quantitative evidence of impact, it collapses many different types of engagement with the poor into one, and then jumps up and down when the “average impact” (of the good mixed in with the bad) is not statistically significant. So it advocates – and sadly, at pretty high levels – for throwing out the baby with the bathwater. It would be more useful for CGD to lead the inquiry into what makes one model different from another, not just in terms of quantitative impact but in terms of what the people on the ground are actually doing.
For more on the dimensions of difference that would be important to measure, see my paper at http://www.altfutures.org/pubs.....ssment.pdf
August 3rd, 2010 at 9:59 am
Eric, I appreciate the thoughtfulness of this comment, but disagree. I am pretty sure that your first paragraph is wrong as a matter of empirical fact. Those who are performing impact assessments of microfinance today well understand its diversity, which is why they are studying it in a variety of forms and places (more studies are on the way). They actually have a hard time persuading microfinance institutions to cooperate with them to introduce the necessary randomization into their operations. They take what they can get.
As always, our evidence is fragmentary. We have two choices: we can generalize from it gingerly, or we choose not to, in which case we know nothing about almost everything and deny the value of theory. To generalize from available data is not to deny diversity.
In which publication do we “throw the baby out with the bath water”?
August 3rd, 2010 at 10:42 am
David, thanks for your reply.
For a sense of what’s behind my “bathwater” comment, one thing that jumps to mind is Nancy Birdsall’s 2nd open letter to Amb. Holbrooke, dated 5/3/10, in which she expresses “discomfort” at FY10 spending level of $150 million in the FATA and “urge[s] considerable caution” in funding, citing that “there is little evidence that development aid in conflict environments such as Afghanistan has achieved stability or security benefits in the short term while there is some evidence that it can be counterproductive.” I understand the plea to use money wisely, but ‘wise’ does not always mean ‘that which provides immediate quantitative evidence of impact.’
As evidence of conflating different forms of “microfinance,” looking for “average impact” that is “statistically significant,” I’ll just cite two things that come to mind quickly. One is a study by Bruhn and Love on Banco Azteca, which they viewed as comparable to a microfinance institution because it had low documentation requirements, small loans, and bank officers on motorcycles.
Uh, what about “Sixteen Decisions”? What about small groups of women, some of whom don’t get their loans until the other women start paying their loans back? Are you suggesting that the people doing these studies (Duflo and others) understand the fine points of these distinctions, and how the Grameen model of microfinance may actually be much more similar to a youth soccer program in the U.S. (e.g., by enforcing discipline around certain practices, making group members mutually accountable, and providing a sense of self-worth) than it is to a financial transaction? (On that note, imagine the impacts we’d miss if we measured youth soccer programs simply in terms of wins and losses.)
I’d also cite the same quote of yours that I used in the paper I shared with you a couple weeks ago. In a blog post earlier this year, you said, “Seeing women crowd into a branch of the Lead Foundation in Cairo to get new loans forced me to confront this paradox; thanks to work on the computer back in the hotel room, I was concluding that there was little solid evidence that microcredit helps on average – yet who was I to tell these women what to do with their lives?” Having confronted this paradox, how have you resolved it, and where should I look to find out how your thinking has evolved?
August 3rd, 2010 at 11:22 am
Eric, note that the phrase “that which provides immediate quantitative evidence of impact” is yours, not Nancy’s. My own assumption on reading your quotation of her is that she had in mind a variety of evidence of different kinds, not least the historical experience of Vietnam that she grew up with. That’s just an assumption, but not one ruled out, it seems to me, by the text quoted.
Bruhn and Love write, “our results add to the evidence on the effects of microfinance since operationally Banco Azteca resembles a microfinance institution.” They do not say Banco Azteca is microfinance, only resembles it. And while I doubt their study for methodological reasons, I think it is reasonable for them to suggest that it is relevant to the question of the impacts of microfinance, mainly because evidence is always highly fragmentary and imperfect, so by that low standard their study has some value. They do not claim that their study proves a universal truth about microfinance.
I am certain that the randomistas generally understand that every intervention they study is a complex, unique beast. That is why they have set up institutions such as IPA and J-PAL, to fund multiple studies of such things as microfinance, in a variety of forms and places (to overcome the lack of academic incentive to keep studying the “same” thing in the same way). If a group of these studies all produce similar results, that helps us abstract beyond idiosyncracies. On the other hand, if they show differences, that is illuminating too.
I point the way to the resolution of the paradox in the blog post you quote. It led me to three chapters, built on three different notions of success (chapters 6–8). Chapter 9 concludes in part by synthesizing the lessons from these three. All are available in draft from the right margin of the blog.
August 3rd, 2010 at 12:16 pm
David, thanks for pointing out that those words were mine, not Nancy’s. I had tried to denote this by using single quotes, not doubles.
On the Azteca example, I don’t agree that using the word “resembles” instead of “is” implies a complex understanding of how the two programs DIFFER. In your work with these researchers, you may want to suggest that they not only highlight the ways in which the program they’re studying resembles microfinance, but also the ways in which it differs. That seems like a good way to make the assumptions of their model more explicit so that you and I and others can debate them here.
But more importantly, it is not enough to put out a disclaimer that, yes, yes, I know, every situation is unique. The highest purpose of studying many different contexts is not simply to find the lowest-common-denominator impact that giving someone $50 – no matter how it’s done, in what social context, through what form of engagement, for-profit or non-profit, etc. – will have on that person’s life and that we can “abstract beyond idiosyncracies.” A higher purpose is to discover the UNEXPECTED ways in which seemingly disparate contexts actually have a few meaningful features in common. These insights provide the real opportunities to improve development policy, stimulating creative innovation that relies on insights and points of view to which our forbears did not have access.
However, if a researcher does not make explicit the conceptual framework behind his or her model and analysis, then he or she risks simply projecting that framework onto the data and measuring only the parts that get confirmed. Other, more meaningful interpretations of the data will be missed. This is why your earlier question, “How can you have a development strategy if you don’t have a development theory?” is so important. If you don’t have a theory that provides hypotheses to be tested, then measurement devolves into data collection and methodological squabbling. But does it really teach us what we need to learn?
I look forward to reading Chapter 9.
August 3rd, 2010 at 1:37 pm
For me this debate does not have enough context to relate to;, and I wonder whether the very idea of this discourse would be different if it was limited to those who have visited in the field
The only banks that I would be comfy to compare Grameen with are those that also integrate community markets and knowledge hubs. Grameen does this with a village centre for each 60 members, and bank branch whose employees visit the 60 centres once a wesk both to do the monetary exchanges and update knowhow sharing on what other hubs are doing
Almost Grameen’s first service after loans was distributing seeds in minute 1 taka bags so members could produce vegetable so their infants could be cured of night blindness. Every service layered on to grameen bank is culturally matched against 16 decisions – what research showed poorest parents wanted invested in for their future generation before the bank was legislated in 1983 to be owned by the poorest. None of the compound dynamics over 33 years of grameen microcredit (concept testing took 7 years from 1976) would have resulted in the 10 times more economic community models that grameen serves in its villages if the ownership had not been by the members
BRAC is different in that its ownership is in trust for the poorest but again year by year if one sees what BRAC built it couldn’t have been done if ownership had been by investors the other side of the world instead of by and for the poorest whose productivity the model aims to peer to peer empower
August 4th, 2010 at 4:54 pm
Is donated equity capital in short supply? That seems to be an implicit assumption in your critique. If true then there would be irony in Yunus’ own criticisms since then it would indeed be true that SKS had no choice.
But from this and other things Yunus has said he appears to believe that there is no shortage of available capital to seed and expand social enterprises such as his own, so he has trouble seeing the benefit of instead expanding the capital base by first transforming SKS into a for-profit and then selling shares to outside commercial investors.
SKS the non-profit began with donated capital. When it established SKS the for-profit it brought in new equity investors. A first concern is that this diluted the ownership claim of the original non-profit. A first concern is that these outside investors might have been able to buy in too cheap which is tantamount to an effective expropriation of the original (client) owners now represented by the various “SKS mutuals” which retain about 33% ownership share I believe. A counterargument is that these private investors brought not just money but expertise and savvy to which the firm now owes its success, and that this could not have been bought any more cheaply under a different model. A second concern is that with an IPO, new commercial investors arrive who have paid a premium price and will now, rightfully demand high future dividends to sustain those prices. Yunus appears to be concerned that this will lead to mission drift (higher costs for SKS clients and/or less service focus on the poor).
If equity capital and management savvy and expertise are available via social investors as Yunus suggests then perhaps one can argue that the original owners (the clients) of SKS indeed did pay too heavy a price for their expansion. Akula (and perhaps you) seem to be suggesting however that these things were not available, in which case the price paid was fair or better.
So where do you stand on this? In other blog posts (e.g. your discussion of “Role reversal”) you seem to suggest that there is too much donor capital available.
August 4th, 2010 at 5:58 pm
P.S. — Let me briefly expand on my last comment. The money raised in this IPO is very large: US$353 million. SKS unlikely could have raised that much capital and that fast through any other method. But that by itself is not necessarily evidence that the existing firm was constrained in its ability to raise capital for the purpose of expanding financial services to the poor. It might have in fact been the case, but my point simply is that this is an empirical question that needs to be explored a bit more carefully, and not an assumption that we should adopted unquestioned).
August 4th, 2010 at 7:36 pm
Jonathan, as a general matter I think you make a good point that there were in my post unexamined assumptions about the availability of capital of various kinds. But I think I can wriggle out of this. When I wrote that SKS had no choice, I was referring to its decision to take loans from banks rather than deposits from clients as a source of capital for lending. This is separate from its decision to seek equity through an IPO. Whichever of those sources it uses, it needs a certain amount of equity to absorb losses. And it is separable from the choice of how fast to grow: even with slower growth, SKS still had to opt for loans instead deposits, however much Yunus questions that path.
Where I think the spirit of your criticism is strongest is in questioning my argument that SKS could or should not raise capital from its clients. I explained my thinking here, but it’s hardly conclusive.
August 4th, 2010 at 8:07 pm
The older generation has good reason to be skeptical of for-profit micro-finance. Traditional micro-finance was caste- based such that the countervailing physical coercive power of the borrowing class capped interest rates and restricted alienation of productive assets. When religious and social prohibitions ceased to be binding, such that capital could directly employ physical coercion, the equation changed and traditional micro-finance became a destabilizing factor. Agency capture, by elites- the President of India herself has been accused in this matter!- vitiated State sponsored initiatives.
It is in this context that Nobel Laureate Yunus is hailed by the older generation. Refusal to accumulate wealth of any sort seems to be the only guarantee that the public will not be once again taken for a ride.
For the younger generation, however, the question remains open. Simple information asymetry should be enough to create a massive arbitrage opportunity. However, if- as increasingly appears the case- the trajectory of Govt. policy is likely to disproportionately make volatile the economic environment precisely for the smallest borrower then, absent some special ‘rent on ability’ possessed by the management of the enterprise, then developmentally speaking a perverse incentive is being created- viz. that micro-finance management will
1) seek to reduce borrower income volatility by acting as a shop window to Govt. sponsored schemes. If, as in the Indian context, such schemes or initiatives are allocatively inefficient, populist window dressing which to be fiscally viable, depend on low take up- then there will be an increased dead-weight loss to the economy as well as an increasing crowding out effect. The nightmare situation is where for-profit Micro finance, struggling to justify share value, ends up contaminating the Capital Markets creating a perfect storm.
The question arises as to why- if India is serious about things like computerized identity cards and properly identifying Below Poverty Line households and so on- micro-finance should not be integrated into a rudimentary welfare system with respect to ‘Crisis loans’, something separate for Students and Young People, and other targeted programs for specific groups?
If the problem is rent-seeking and Agency Capture- those dangers exist in a yet more threatening form in for-profit Micro Credit.
This is not to say that visionaries genuinely committed to helping the poor should automatically be viewed with suspicion just because the access the Capital Markets to grow their enterprise.
August 7th, 2010 at 5:38 am
Hi Eric,
I did exactly as you recommended for studying microfinance in attempting to meet “A higher purpose is to discover the UNEXPECTED ways in which seemingly disparate contexts actually have a few meaningful features in common.” My book Comparative Practices and Perspectives: Gender, Development and Empowerment in Uttarakhand, India and Northern Virginia is a qualitative comparative case study which investigated the values, practices, perspectives and strategies of Indian and American community organizers (practitioners and volunteers of non-profits and non-governmental organizations) who use microfinance, including mobilizing savings-led community managed credit groups, as an instrument within the social intermediation process of developing disadvantaged women’s capabilities for self-sufficiency/empowerment. The focused inquiry was conducted through in-depth interviews of directors, staff members, and literate as well as illiterate volunteers/community-based organizers of a women’s business center in Northern Virginia, and a women’s federation of 15,000+ members in the rural Himalayas of Uttarakhand, India. Interview questions focused on savings, social intermediation, and financial sustainability/subsidization, which are three significant facets of microfinance. Geographer, Cindi Katz’s framework for constructing analytical topographies, contour lines, and countertopographies was used to structure the various levels of analysis. Differences were explained by situating each organization in Mayoux’s theoretical paradigms of “Women’s Empowerment through Microfinance.”
I actually found more similarities than differences between the American SBA funded women’s business center and the Indian grassroots NGO which essentially supported women’s village groups operating their own VSLs. The similarities are rooted in their values, which then essentially shapes their practices and strategies. The long-term success the clients of these non-profit organizations experience in their lives can be related back to the values these organizations have instituted. For instance, because the Indian NGO values equality, it engages in forming village-wide groups, wherein a woman from every household in the village becomes a member of the group – rather than having a number of groups formed along caste and class lines, which often happens with the Grameen/JLG methodology. It takes much more time and more in-depth engagement, but it has resulted in women coming together to support each other in ways that reap benefits and rewards far beyond the proposed ‘individual economic impact’ that commerical microfinance claims to make. The results have been women, including very poor, low-caste women, standing for local elections, winning seats on their own merit, and changing how development funds/schemes appropriated to their communities are disbursed. Indeed other studies have also shown that elected women that had participated in SHGs or VSLs were more actively engaged in their elected positions than women who had not had this previous community experience (as most often happens with the Indian election quota system, many women-reserved election seats have become puppet seats, with husbands or sons, actually running the ‘office’.)
Such results cannot and will not be realized by commercial microfinance – as the only value that remains in this method is profit-maximization. Indeed, Women’s World Banking has noted the irony that the more commercialized the industry becomes, the focus and participation of women, both in numbers of clients and women managers, actually deteriorates.
http://amzn.to/c9fPqW
I had sent this book to David over a year ago for review, but I never heard back from him, I presumed this type of unconvential qualitative study, did not figure into the framework of his own book.
August 7th, 2010 at 9:14 am
Sara,
I’m thrilled to hear about your work. People’s values and assumptions guide their strategy and their analysis whether they realize it or not. I agree with you that “Such results cannot and will not be realized by commercial microfinance – as the only value that remains in this method is profit-maximization.” Thus, David’s chapter on microfinance as “industry building” is somewhat ironic: the same analysis could be done for lotteries, pay-day lending, and other ways in which the rich profit from the poor. Not distinguishing these “industries” from the social interaction associated with many models of microfinance seems foolish indeed.
Not to take anything away from their work, but I think it is good to point out to our friends at CGD the blind spots of their analysis.
Best,
Eric
November 7th, 2010 at 10:18 am
Micro-Finance to Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!
SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of the micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days. Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week. We expose the dark underbelly of a Frankenstein unleashed by NGOs.
Read more: http://devconsultgroup.blogspo.....inful.html