MICROCAPITAL STORY: Microfinance Debate Featured on BusinessWeek.com, Vikram Akula of SKS Microfinance and Chuck Waterfield of Microfin Weigh In

Following an article in the December 13 edition of Business Week entitled “The Ugly Side of Microlending,” Business Week’s website now features a point-counterpoint which asks the question: Does microfinance helps low-income entrepreneurs in developing economies more than it hurts them? Vikram Akula of Indian microfinance bank SKS Microfinance Private Ltd. argues in favor of the proposition, while Chuck Waterfield of Microfin argues that the banks are generally more harmful than beneficial to low-income entrepreneurs. The core issue of the debate centers on whether the banks are usurious in the interest rates they charge.

Vikram Akula is founder and CEO of SKS Microfinance, one of the fastest-growing microfinance institutions (MFIs) in the world with nearly 300 percent growth in the past year. He was named one of TIME Magazine’s 100 Most Influential People of 2006. As of March 2007, SKS had USD 78.8 million in total assets, a gross loan portfolio of USD 63.2 million and a return on assets of 1.75 percent. Currently, SKS has 551 branches in South Asia and serves 1.2 million clients.

Mr. Akula argues that it is a misconception that MFI interest rates gouge the participants. Micro-enterprises earn disproportionately high returns on investments and, thus, are able to better absorb the cost. The reason for these disproportionately high returns, according to Mr. Akula, is that microenterprises: 1. Primarily use family labor; 2. Have low infrastructure costs (e.g. village groceries are often home-front stores); 3. Are in the informal sector of the economy where there are no taxes or legal fees; and 4. Operate where financial capital is a small percentage of the overall inputs, which are primarily labor.

These four characteristics of most micro-enterprises cause them to yield uncommonly high returns on investment, and thus, Mr. Akula argues that these businesses can hardly be considered victims of usurious lending practices. Mr. Akula also explains why such interest rates are necessarily high. Chief amongst these reasons is the high transaction cost of making a large number of tiny loans (as opposed to a small number of large loans) and the need for more intensive service in this sector (e.g. loan officers often have to travel to remote villages to give loans and collect repayment).

While Mr. Akula admits that in situations where near monopoly conditions exist, lenders have abused their position by charging exploitative interest rates, he does not believe that the problem would be alleviated by capping interest rates. Instead, Mr. Akula suggests allowing the market to create competition and lower prices.

Taking the counterpoint position, Chuck Waterfield is the developer of Microfin, the most widely used financial projection and planning software for MFIs. Mr. Waterfield has over 20 years experience in microfinance, having started MFIs in Haiti and Bolivia in the 1980s and 1990s and served as microfinance director for MEDA and CARE International. Currently, he works as an independent consultant whose clients include the Consultative Group to Assist the Poor (CGAP), the Small Enterprise Education and Promotion (SEEP) Network, ACCION International and Opportunity International.

Mr. Waterfield concedes that if priced fairly, microfinance services can offer benefits to both the lender and the entrepreneur. He argues, however, that the aggressive growth goals of for-profit banks in the microfinance sector will necessarily put these banks in a position of exploitative money lending.

Mr. Waterfield calls for regulation in microfinance lending to provide safeguards for entrepreneurs to defend the original principles on which microfinance was founded – to help the poor. To illustrate the potential consequences of not developing these regulatory mechanisms, he cites the example of pawn shops, which were originally started by churches to help their parishioners but devolved into more base establishments. Microfinance lending may tend in such a direction if there are not safeguards put in place to prevent exploitation of the poor, according to Mr. Waterfield.

For more information on this topic, please see the following sources:

CGAP Donor Brief No. 6: “Making Sense of Microcredit Interest Rates.”

BusinessWeek.com: “Online Extra: Yunus Blasts Compartamos.”

MicroCapital.org: “PBS Program ‘NOW’ Asks ‘Who’s Making Money from Microcredit?’

PBS online: “Who’s Making Money from Microcredit?

CGAP Donor Brief No. 18: “The Impact of Interest Rate Ceilings on Microfinance.”

CGAP Occasional Paper No. 9: “Interest Rate Ceilings and Microfinance: The Story So Far.” and CGAP Focus Note No. 33: “Competition and Microcredit Interest Rates.” Both available for download here.

Additional Resources:

BusinessWeek.com: “The Debate Room: Micro-finance Boosts the Poor.”

BusinessWeek.com: “The Ugly Side of Microlending.”

SKS Microfinance

SKS: Resources- SKS News: “Vikram Akula, SKS Microfinance Founder & CEO, named to TIME Magazine’s Top 100 List of Most Influential People.”

Microfinance Information eXchange (MIX): SKS (SKS Microfinance Private Limited)

School of International and Public Affairs (SIPA), Columbia University: SIPA Faculty: Chuck Waterfield

Microfin

Microfin: What Is Microfin?

Consultative Group to Assist the Poor (CGAP)

Small Enterprise Education and Promotion (SEEP) Network

ACCION International

Opportunity International

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