MICROCAPITAL SPECIAL FEATURE: Mohammad Yunus and Michael Chu Debate Profiting from Poor People at the Worldwide Microfinance Forum

“Is it fair to do business with the poor?”

Mr Mohammad Yunus and Mr Michael Chu debated whether commercial finance should make a profit from doing business with the poor in the plenary debate at the World Microfinance Forum, October 1 – 2, 2008, in Geneva.

Although Professor Mohammad Yunus is the founding father of microfinance and its chief proponent, the Nobel Prize winner is cautious about the positive impact that Western commercial investors can have on microfinance. At the Worldwide Microfinance Forum in Geneva, October 2, 2008, in a debate entitled “How fair is it to do business with the poor?” he questioned how appropriate it was for commercial finance to invest in the microfinance industry for profit. Mr Michael Chu, a former President and CEO of ACCION, and keen proponent of further investment and the commercialisation of the industry, took the other side of the floor.

First principles

Mr Yunus’ believes that the primary motive of helping people out of poverty should not be coupled with the aim of making a profit. Aligning the two requirements can lead to mission drift with the result that the poor get an ‘unfair’ deal. He supports social businesses, like his own Grameen Bank, which not only lends money to the working poor, but is also owned by them. He explained, “I could have done it differently, it {Grameen} could be owned by a few or by me, for example.” But this would have gone against his first principle, which is poverty alleviation.

In his view finance is merely a tool to use in pursuit of his goal to help the poor. If the cycle of poverty can be broken with the intervention of a loan, he believes the recipients will then help themselves and amazing things can happen. “Poverty is not the person…. all human beings have unlimited potential and the same capacity, whether rich or poor.”

Role of profit

Mr Chu understood how Mr Yunus’s message appeals to humans’ better natures, by acknowledging that the “tremendous discomfort” felt by people about making a profit out of the poor was very natural. “Hundreds of years of culture equates profit with greed, but service to the poor with self-sacrifice, but is this valid in the eyes of the poor?”

According to Mr Chu, “to roll back poverty rather than to merely alleviate it”, any solution needs to be able to reach massive numbers, deliver permanent results that can help many generations, provide continuous effort so it gets better and better at what it does, and provide continuous efficiency so it also becomes cheaper and cheaper. Mr Chu believes the only state that can offer all these four requirements is business.

Mr Chu estimated that the outstanding loan requirement amongst the poor worldwide is USD 500 billion and that this cannot be filled without the use of commercial finance.

Will competition bring lower interest rates?

Mr Yunus was not convinced that further competition lowers interest rates and brings efficiencies that will help the poor. He believes that low interest rates should be set and not come as a by-product of competition. On the other hand Mr Chu thought competition was “crucial” and provided the example of Bolivia, where rates have dropped inexorably since 1998 when competition started. Mr Yunus responded, “I believe in competition, not to make myself richer, but to make life better for the poor. What are you competing for?”

Will private commercially motivated investors make microfinance institutions (MFIs) raise interest rates and pull away from the poor?

Mr Chu thought this question was a red herring. “Strong MFIs know their segment well. It would make little sense for officers with dust on their shoes to chase after rich clients.” If MFIs are doing well in their own field they should have no motivation to move to another segment, he explained, using the example of the food retail trade, where few fast food chains suddenly want to become exponents of fine dining if they are successful. Mr Yunus thought there would be mission drift if MFIs’ number one goal was no longer helping poor people.

Do MFIs know when they are over-indebting their clients, and to what extent is this happening already?

Mr Chu admitted that this will happen, as increasing competition is likely to lead to indebtedness as “lots of money will be looking for a home.” The expansion process will not be smooth and there may be some casualties along the way. Mr Yunus believed this problem would not necessarily occur if the Grameen model were followed as it does not issue penalties to borrowers. “We will welcome people, whatever” (i.e. regardless of problems with repayments).

Is raising foreign capital necessary for MFIs?

Mr Yunus thought that the ultimate solution for MFIs is to rely on local money. “External money could provide risky solutions – foreign exchange risk.” Any money should be provided in local currency and mainly be used to facilitate the development of local money resources, rather than take the place of them.

Mr Chu responded that not all foreign capital, such as equity investment, leads to foreign currency exposure. Also, there were potential upsides to foreign currency, which generally is offered at lower interest rates than local currency. The risk and reward of both these sources of funding need to be managed professionally by the treasury of each MFI, requiring an increase in the professional management skills in the industry.

Challenges and opportunities

Both men saw the regulatory and legal environment as being fundamental to the evolution of the microfinance industry over the next 10 years. Mr Chu worried that political interference and poor regulatory involvement could undermine the growth of the market, through capped interest rates, for example. Measures such as these, “suck money away from the poorest people.”

Mr Yunus also thought there was a challenge for the regulatory bodies, and was especially keen that “legal frameworks allowing MFIs to become banks were developed, allowing deposits and local money to develop MFIs further.” For him the future lies in the hands of the working poor. “The next generation will be different and much more equipped.”

Role of the donor community

Both men thought the role of the donor community would be diminished in the future, though they played tribute to the community’s importance in establishing microfinance. Mr Yunus thought that in the future donors could plug the gap in funding when deposit taking is not possible, but admitted that, “donor dependency is a sign of immaturity,” and that their involvement would only be an interim solution. Mr Chu thought “donors must be careful so that their presence does not delay the acceleration of the market.” They should focus on what they do best, nurturing new concepts or being involved in areas where profitable solutions had yet to be established.

The Future

When asked about who the dominant players would be in 20 years time, both agreed that there would be organisations not even envisaged today. Both believed that the stimulus for development would come from the poor themselves. Mr Chu thought the poor would stimulate change through their power as clients, as the concept of the poor being clients to be serviced becomes more established, leading to the development of businesses and initiatives designed for them. Mr Yunus thought the talent of the poor, given further opportunities through microfinance and education will change the future, saying people will, “Look at the poor as a missed opportunity to change the world.”

Local vs. International

The real debate was not about the fairness of doing business with the poor, but where should the money come from to do business and who keeps the profit afterwards. Mr Chu represented the international capital markets and Western investors following free market methods of investment. Mr Yunus thought the role of foreign investors is to facilitate the collection and use of local money, with the profits going back to local people.

Mr Yunus’ stance on commercial investment was in some ways a direct contradiction to the purpose of the conference, convened to uncover ‘Profitable Investment Opportunities,’ but the investment managers and financial specialists in the audience were nonetheless electrified by his presence and humanitarian message. It was Michael Chu, defending the role of the capital markets, who “spent an uncomfortable hour.”
However, the difference between the two sides could not separate their fundamental optimism both men felt for the future of the industry.

By Amy Rennison

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6 comments

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  3. Jerry Peloquin

    It seems to me that there are valid arguments on both sides and if I may put forward a few…? In the final analysis I come down mostly on the side of Dr. Yunus … but there are problems in MFI land …

    One problem is that capitalism reveres profit above all else. If a ten percent profit is Ok, a one-hundred percent profit is ten times as good and a one thousand percent profit is better yet. No amount of profit is excessive. So there, there enter Dr. Yunus’s Social Business.

    Chu would argue that, the market will control these prices. Yes, over teme, that is, unless, of course, the providers get together and agree on the price, like in a cartel (but, not so open and obvious) Clearly this is happening in some areas of the world. Effective interest rates in excess of one hundred percent are not defensible under any economic argument possible.

    The poorest of the poor are indeed the focus of many strong social mission MFI’s NWTF, The Grameen Bank, etc … but, many Micro Banks do not lend to the poorest … many MFI’s are really lending to the unbanked who, although outside of the formal economy, are not poor by most poverty standards of a dollar a day incomes.

    In fact, the MFI as an instrument of abject poverty alleviation would seem fairly effective, but as a tool for community economic development it is, for the most part a total failure. Most MFI borrowers are essentially subsistence borrowers. Example… they buy a case of coke in the morning and sell one can at a time … this subsidizes the family budget, but this is not a business that will ever reach the formal economy, never hire staff, never grow to become a pillar of the community.

    Also, in some ways the MFI borowwer is like one of us living off of our credit cards… they pay much more interest than we do AND… a borrower can kite one MFI against another… and they often do. The MFI is incented to keep the borrower in the lending cycle as long as possible… some having been borrowers for fifteen years or more.

    Also, although The Grameen Bank is an excellent example of good MFI practice, many are not … most MFI”s do not offer business development services, (BDS) seeing it as too expensive and causing too much impact on “profits.”

    I sympathize with Chu and the need for profit but I would be much more convinced if the MFI’s did not lend but invested in their micro enterprises. That would put both investor and borrower on the same side of the fence and the MFI would have a truly vested interest in the success of their “partners.” … not just coming by every week with their hands our for that installment payment.

    On the other side… well, another time perhaps…

  4. K.L.Srivastava

    We should recognise that we live in an imperfect and unjust world.

    In the present situation, we need a new brand of capitalism (i.e., compassionate capitalism) for integrating more and more people from “bottom of the pyramid” in the mainstream economy.

    I am more in agreement with Yunus’s view of social business.

    The developing countries like India need to formulate new regulatory frameworks for social businesses. I think
    that the existing legal frameworks in India are not appropriate for social businesses.

    I think we need to learn from “Community-interest companies (CICs) in the UK and Limited-profit and limited liability companies in USA.

    Regards,

    KL