Muhammad Yunus, the microfinance pioneer and winner of the Nobel Prize for founding the Grameen Bank, spoke out against the growing trend of commercial microfinance. In an interview with CNNMoney.Com, Yunus chastised those involved with for-profit microfinance by saying that “poor people should not be considered an opportunity to make yourself rich.” These remarks come at the start of the Asia-Pacific Regional Microcredit Summit 2008 in Bali Indonesia.
Arguments between commercialization and civic-mindedness are constant in the world of microfinance and recently made an appearance in the Wall Street Journal. According to theStreet.com, “the commercialization of microlending has expanded the availability of loan capital.” This argument has been the key component of the for-profit side of the debate, which believes that charity and goodwill will not attract enough money to reach the billion people still without access to basic financial services.
Since microfinance was started in part to free the poor from loan sharks who charged exorbitant interest rates, Yunus and those opposed to profit-maximization believe that commercial microfinance institutions (MFIs) are a “distortion” of the goals of microfinance. Yunus told theStreet.com, “microfinance doesn’t need the capital markets” and stated his belief that MFIs should charge for the cost of borrowing funds, plus 10 to 15 percent for operating expenses. He continued by arguing that “10% to 15% is ‘slightly on the high side,’ while those who tack on more than 15% have ‘just left the microcredit area and joined the loan-shark area.'”
Yunus argues that MFIs should “look at it from the cost side, not the market” and develop institutions that are self-sustaining without profiting from the poor. Yunus’ own organization, the Grameen Bank, charges rates of 20 percent, which led to a small profit of approximately Taka 106.91m (USD 1.56 million) in 2007. But even the small profits earned from the bank’s activities benefit the poor, not foreign investors. Ninety percent of the shares of the Grameen Bank are owned by the poor borrowers and the other 10 percent are owned by the Bangladeshi government.
While returns on loans and deposits have sustained the original Bangladeshi bank since 1998, donor money has been necessary to fuel the Grameen Foundation’s (the overarching organization that manages the rapidly expanding family of Grameen MFIs, profitless businesses, partnerships and NGOs) expansion into other nations and its provision of loan guarantees to other emerging MFIs. According to their 2006 annual statement (the most recent available online), 93 percent of the Grameen Foundation’s money came from grants, contributions and the Total Growth Guarantee Pool, which consists of loans to MFIs backed by the Grameen Foundation with donor money. Those supporting the emergence of for-profit microfinance believe that, despite the success of the Grameen Foundation, microfinance will not be able to expand around the world quickly and efficiently without the help of for-profit institutions and capital markets.
Many of the Grameen Foundation’s activities, including the Total Growth Guarantee Pool, seem to contradict Yunus’ criticisms of capital market involvement in microfinance. According to Alex Counts, president of the Grameen Foundation, “Local financial markets have a critical role to play in fuelling the growth of microfinance institutions worldwide … As the sector matures, we [the Grameen Foundation] will continue using our Growth Guarantee program and other financial tools to spur even more innovative transactions and opportunities for MFIs.”
Despite the raging debate, the positive aspects of for-profit microfinance have attracted growing amounts of capital from social investors, implying that many believe in the benefits of attaching the capital markets to microfinance. According to the Social Investment Forum, a trade association, socially responsible investors are “increasingly embracing international microfinance opportunities to promote positive social and economic development abroad.”
Investments in microfinance have also attracted investors focused solely on financial returns. Many prominent investment firms, including Citigroup, Morgan Stanley, Merrill Lynch, Deutsche Bank and Credit Suisse, have become involved in microfinance investments. Private equity companies, including Sequoia, Blackstone Group and Carlyle Group have also focused attention towards microfinance. According to CNNMoney.com, Deutsche Bank believes “that private investors, drawn by the sector’s social mission, stable returns, low default rates, and potential as a diversification play, will be pouring $20 billion into micro-finance institutions in 2015 — ten times more than they did in 2006.”
Yunus, however, believes that pension funds and other investors should not be investing in microfinance securities or developing markets because “lending becomes complicated when you’re out of the country.” Instead, he argues that “if you want to support microlending … put your money into the [microcredit] bank,” although it was not entirely clear from the article whether he meant that outsiders should save their money in MFIs or merely make donations to MFIs that were not yet self-sustaining.
The articles available online covering his remarks did not mention any distinction being drawn between capital market transactions involving investment firms, pension funds and socially responsible investors and the loans made to MFIs, which are often supported by the Grameen Foundation. They also did not reference a moral distinction between profiting on the lending of money to MFIs, as many banks do with Grameen support, and the MFIs earning profits on loans to individuals.
Yunus’ criticisms of capital markets do not end at the boundaries of microfinance. According to Forbes.com, Yunus believes that the recent economic problems demonstrate the need for major revisions to the current system. He called the current situation a “wake-up call” and compared the Grameen Bank favorably to the for-profit institutions, saying, “we don’t have a subprime crisis, our repayments are very good.”
One thing that the goodwill and efficient market factions do agree on is the need for increased transparency in microfinance interest rates. A new organization, MicroFinance Transparency, is being developed to improve the reporting of interest rates for MFIs. Members from both sides of the for-profit debate, including Yunus, support the measure, which was founded by Chuck Waterfield, a professor at Columbia University. More information on this new deal will follow in a subsequent MicroCapital story.
The Grameen Bank, founded by Muhammad Yunus in 1976, is used as a model for other MFIs around the world. According to MIX Market, Grameen had total assets of almost USD 820m (in local currency), a debt to equity ratio of 825 percent and a return on equity of 22 percent as of December 31, 2006. Valued at the same date, the bank had a gross loan portfolio of USD 482m (in local currency) and 6,287,000 active borrowers, a number which rose to 6,707,000 by the end of the following year.
Yunus, who won the 2006 Nobel Prize along with the Grameen Bank, is also the author of “Creating a World Without Poverty: Social Business and the Future of Capitalism” and “Banker to the Poor.” He is widely considered to be the founder of microfinance. MicroCapital has reported extensively on the ongoing debate regarding for-profit microfinance. Much of the debate centers on Compartamos, a publicly traded MFI. To read more about the debate, and Compartamos in particular, please reference these previous microcapital stories.
By Greg Casey, Research Assistant
CNNMoney.com: “Nobel winner slams for-profit microfinance”
TheStreet.com: “Microfinance Experts Criticize Mexican Bank”
Forbes.com: “Yunnus’ Bank Shot”
MicroCapital article, May 19, 2008: “Asia-Pacific Regional Microcredit Summit 2008 Hosted by Microcredit Summit Campaign and Gema PKM“
Wall Street Journal: “Markets for the Poor in Mexico”
Social Investment Forum: Home
MIX Market: Grameen Bank
Citi Group, Inc. Press Release: “CitiBank India & SKS Announce USD 44 Million Rural Microfinance Program“
Grameen Foundation News Release: “Grameen Foundation Engineers More Than $100 Million in Local Currency Financing”
Grameen Foundation: Capital Market Transactions
BusinessWeek: “Setting Standards in Microfinance”