Vinod Khosla, former CEO of Sun MicroSystems and founder of venture capital firm Khosla Ventures, argues that both for-profit and nonprofit microfinance models can serve a beneficial role, but ultimately points to for-profit status as the goal microfinance institutions (MFIs) should be aiming achieve. His argument is a contribution to the debate about whether or not MFIs that operate on a for-profit basis necessarily are “exploiting the poor.” He writes that for-profit MFIs have the capacity to increase the scale of their impact and can effectively do so given many of their advanced management systems, but will also most likely overlook some of the “ultra poor.” Nonprofit MFIs, on the other hand, are pressured to use innovative measures to serve those communities that for-profit MFIs do not, serving a more economically diversified client base. But, he writes, they also tend to be overly dependent on donor resources allocated to research instead of expanding financial services to greater numbers of potential borrowers.
Mr Khosla urges MFIs to steer away from philanthropy and more towards capital markets to access commercial funding that can make them stronger. Such funding, he writes, increases credibility among commercial banks and helps build equity. Despite concluding that the for-profit model is a vital component to increasing scale, he writes that commercial investors interested in for-profit MFIs might pressure them to increase interest rates and raise fees, leaving the burden on the borrower. He calls for social investors to take a lead role to counteract interests that might hinder the ultimate goal of helping the poor [1].
By Diana Baide, Research Assistant
[1] The Times of India. “Lending A Helping Hand” by Vinod Khosla, 18 September 2010
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