HELPING THE POOR FOR PROFIT
NEAL CONAN, host:
This is TALK OF THE NATION. Im Neal Conan in Washington.
You're probably aware of microfinance, the practice of lending very small amounts of money to very poor people, most of them women. In 2006, Muhammad Yunus, who's often called the godfather of microfinance, received the Nobel Peace Prize for his work founding the Grameen Bank in Bangladesh.
Yunus argues that making money off the poor is unethical. Others, though, argue that the model needs the model - the charitable model cannot reach all the people who need help.
Vikram Akula is among those who believe the ambitious goals of microfinance need outside investment and the efficiency of McDonald's or Starbucks. This can work driven only by greed, he told the Wall Street Journal, and he joins us in just a moment.
If you've worked overseas and have experience with microfinance, call and tell us your story. Our phone number, 800-989-8255. The email address is email@example.com. You can also join the conversation at our website. Thats at npr.org. Click on TALK OF THE NATION.
Vikram Akula is the founder of SKS Microfinance. His book, "A Fistful of Rice," came out this month and tells the story of his quest to end poverty through profitability, and he joins us now from his home in Hyderabad in India.
Welcome, and I don't know if they celebrate Thanksgiving in Hyderabad, but I suspect they did in your house in Schenectady when you grew up.
Mr. VIKRAM AKULA (Founder, SKS Microfinance): That's correct, Neal. It's great to be on your show, and Happy Thanksgiving to everybody.
CONAN: Now, briefly, why is it important to inject the profit principle into microfinance?
Mr. AKULA: So let me say at the outset that, you know, we have great respect for Professor Muhammad Yunus of the Grameen Bank, and he really invented a way of lending to poor people that otherwise just didn't exist.
Poor people were vulnerable to loan sharks, and they just didn't have any access to, you know, bank loans. And his group-lending model really was a fantastic innovation.
The difference that we have at SKS Microfinance is that we follow that model of group lending at the field level, but what came clear to me and I used to work in sort of the nonprofit, a nonprofit organization doing microfinance - is that by taking that model of running it as a nonprofit, you simply weren't able to access the kind of funds that is needed by the poor today.
And just to give you a sense of the size, Neal, it's, you know, about four billion people across the world live at less than $2 a day, and it's an estimated credit need of something in the range of three to four hundred billion dollars. And by having a nonprofit approach, you're simply not able to raise that type of donations or subsidized funds, and that's why I felt that the better way to potentially try and access that fund was to run an organization on for-profit lines and be able to run it in a commercially viable way.
CONAN: For-profit lines, including, as we suggested, more efficiency in the operation.
Mr. AKULA: That's correct. So when I say for-profit, a commercial approach, I mean not just one that is, you know, financially viable but also one that draws on the best practices of the business world in terms of scaling and business processes, but also uses extensively technology in a way that had traditionally not been done in microfinance.
So these are the three elements that went into the commercial model of microfinance that we've developed here at SKS Microfinance.
CONAN: And how what kind of interest rates do you charge, and have they changed over time?
Mr. AKULA: Sure. Before getting into that, I'd like to just share with you the story of, you know, how this idea first occurred to me. And again, I'll go back to the days when I was a fieldworker with a nonprofit, you know, doing nonprofit microfinance.
And basically I would go out and deliver loans and see people start these small businesses and see how women would, you know, dramatically change their families' life.
But oftentimes women from more remote villages would come to me and say: Can you start in our village? And I'd always have to kind of throw up my hands and say, you know, I'm sorry, you know, our grant is coming to an end, so we really can't go beyond any other, any villages beyond where we are.
One day, a very poor woman, she was emaciated, you know, torn sari, she had walked quite a distance to ask me the same question about whether we could start in her village. But when I said no to her, unlike the other women, who simply walked away disappointed, she looked me in the eye and said: Am I not poor too? Do I not deserve a chance to get my family out of poverty?
Now, for me this was a jarring question because here I was thinking, okay, I'm really trying to do something to make a dent on poverty, but her question made me realize that if you're doing microfinance in only 100 villages, serving only 5,000 people in a country like India, where you've got 800 million people living in poverty, you know, what are you really doing for poverty eradication?
And her question jarred me so much that that's when I left my NGO, my nonprofit, went to the University of Chicago and basically tried to answer a question, which was: How do you design microfinance in a way that you never have to say no to any poor person who's simply asking for an opportunity?
And then I came back to India and said, okay, let me try this on, you know, a for-profit line and see if we can actually do that. Now, our organization has been around for about 12 years. So today we serve eight million clients, eight million poor households. We've dispersed more than $4.5 billion.
So in some ways that experiment that I started from 12 years ago has turned out. Today we can go back to that woman I met many years ago, and for that matter we can go to any poor woman anywhere in the country and say yes, you too, can have an opportunity. How much do you need to start your small business?
CONAN: And this is a loan extended without collateral, but yes, with interest. And how much interest do you charge, getting back to the question?
Mr. AKULA: Sure. So on the question of interest, the first thing one has to keep in mind is, you know, there's a high cost of delivering a small loan. So you know, if you're delivering a $100,000 loan, you know, there might a certain administrative cost, but even if you're delivering a $10,000 loan or a $1,000 loan, or in our case a $200 loan, you still have the same administrative cost.
So as a percentage, this would seem, you know, quite high. So we have to keep that in mind. In our case, what we do is we charged anywhere from 27 percent, and we've just dropped our interest rates to about 24.5 percent interest.
Now, that seems, by U.S. standards, you know, very high. But keep in mind for, you know, poor people in villages, the only available lending is from the village loan shark, who's charging anywhere from, you know, 35 percent to in some cases as high as 100. If it's daily finance, it goes as high as 1,000 percent interest.
So if you keep in mind those are the existing rates, and then if you keep in mind the bank rates in India, given inflation, may be around 12 percent, but what happens for a poor person is to access that 12 percent loan, if they start calculating the full transaction cost, how many trips they have to make to the bank branch, lost wages, bus fares and so on, it turns out to be much higher than 24 percent.
That's why when we offer a poor person a 24-percent-interest loan, it's actually the lowest-cost finance available for them, and we also know, the studies have shown that even at 24 percent, poor people can start small businesses and actually earn very significant returns for themselves.
So for example, a seven-year study that was done on my own institution suggests that people, after they pay the interest, are earning 45 percent in terms of their annual increase in income. So that's the rate that we charge today, about 24.5 percent is the rate that we currently charge.
CONAN: And how much of the money generated by those returns then leaves the community and goes back to pay your investors, the people who provided the capital in the first place?
Mr. AKULA: So if you look at, for example, the metric of return on equity, you know, last year our return on equity was about 21 percent. Now, that's a very healthy return, you know, in a financial services company in India.
Another way to think about that is if you look at 24 percent interest, our costs are as follows. We are not a bank. We're just a lending company. So we have to borrow from commercial banks, and typically our borrowing costs are somewhere in the range of, you know, 9.5, 10 percent.
Then, as I mentioned, to deliver in our case a $200 loan out to a remote village, you know, there's about 10 percent cost of delivery. So on a $200 loan, we're spending, you know, $20 to pay the staff who go out and deliver the loan and then go weekly and collect, you know, $4 repayments from people. So that's about 10 percent.
And then another one percent or so is loan loss provisions for write-offs. Another two percent, one percent, depending on the profitability, is the tax.
And it leaves our investors with a two percent margin, if you will, a profit margin, and that translates in our case to something in the range of about 20 percent return on equity.
CONAN: Let's bring another voice into the conversation. Alex Counts is president and CEO of the global nonprofit organization Grameen Foundation. He trained under Muhammad Yunus, the founder of the Grameen Bank, and joins us today by phone from New York, where he's visiting his family. Thanks very much for taking the time out. Happy Thanksgiving to you.
Mr. ALEX COUNTS (President and Chief Executive Officer, Grameen Foundation): It's my pleasure.
CONAN: And I know that the Grameen Foundation shares goals with SKS Microfinance to bring people out of poverty with very small, collateral-free loans, but don't necessarily share enthusiasm for some of the techniques.
Mr. COUNTS: That's right. I first of all want to congratulate Vikram - I think it's in the dead of the night there - on his book, on his achievements with SKS.
But I think that in the recent times and the way SKS has moved, it's not something that we would be supportive of from Grameen Foundation, drawing from our Grameen Bank experience.
I think he's even in this show has set up kind of a false dichotomy between nonprofit and for-profit microfinance. Grameen Bank is a for-profit bank, has been so since 1983. It's been profitable most years. It's highly efficient, offers a lower interest rate than SKS, has mobilized so much savings that it also doesn't have to say no to anyone who wants a loan.
But it does this in a way that is a truly double-bottom-line type of activity, where the social purpose remains paramount, and the business efficiency is a means to an end. It isn't an end in itself.
CONAN: And so therefore, if this is more competitive, presumably if you'd offer lower rates, you would put SKS out of business.
Mr. COUNTS: Well, we're doing Grameen Bank only operates in Bangladesh. It has not crossed the borders into India in any meaningful way. But in Bangladesh, where there's been, you know, strong moral leadership in terms of microfinance, and also very efficient business practices, the overall rates are lower than India. We hope India will catch up.
But also, I think that strong moral leadership, where, for example, Mohammad Yunus owns no shares in any Grameen company - he could be a millionaire many times over if he had even a few shares in some of the profitable, other profitable Grameen companies - that has helped maintain a level of public and media and politician support for microfinance that has really come unraveled in India in recent weeks, and that's quite worrying and is not only endangering SKS but many of the other providers there.
CONAN: We're talking about the - helping the poor for profit. Stay with us. You're listening to TALK OF THE NATION from NPR News.
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CONAN: This is TALK OF THE NATION from NPR News. Im Neal Conan in Washington.
A little later in the program, we'll take a moment to remember absent friends, the people who won't be with us at the table this Thanksgiving. You can send us an email now. Tell us who's not at your table, how you'll remember them today, firstname.lastname@example.org. And we'll share some of those stories later in the hour.
Right now we're talking about the future of microfinance. Microlending programs have evolved, and some companies now provide small loans to poor people around the world and turn a profit.
There's a difference of opinion over the proper model. If you've worked overseas and have experience with microfinance, tell us your story. Our phone number, 800-989-8255. Email us, email@example.com. And you can join the conversation at our website. Thats at npr.org. Click on TALK OF THE NATION.
Our guests are Vikram Akula, the founder of SKS Microfinance, a for-profit microlending institution in India. His new book is "A Fistful of Rice." Also with us, Alex Counts, president and CEO of the Grameen Foundation, not linked directly to the Grameen Bank, but it helps microfinance institutions continue that model of offering small loans to poor people with a different not necessarily not-for-profit, but a different profit model.
And Vikram Akula, just before the break, Alex Counts was talking about the importance of the moral leadership, that Mohammad Yunus does not make as much money as he might from his organizations.
And we have this email from John(ph) in Oakland, California, asking: What's your annual salary?
Mr. AKULA: So my annual salary today is one rupee a month, you know, which translates to about 12 cents. But I think to be fair to the question, the question really is what my stock options are worth. And, you know, they're worth quite a bit, both stock options that I have, you know, sold, as well as what I have in the future.
And so I don't want to duck the question, but what I do want to say is I don't think there needs to be a wall between doing well and doing good. I think in microfinance, what we've shown at SKS is that you can actually do both.
And in fact, what we believe is that by pursuing a for-profit orientation, you actually bring in capital from capital markets that's simply looking to get a return, and by doing that you actually bring in much more capital than you would otherwise.
If you look at today, you know, in the space of 12 years, the bulk of it happening in the last five years, when we converted to a for-profit, we've dispersed $4.5 billion of loans. Now, that didn't draw on a single, you know, sort of penny of subsidized or donor funds. It's purely from the market.
And that, to me, is significant because if you can tap into capital markets, then you can tap into precisely those places where the large quantum funds that is needed by, you know, unfortunately the large number of poor people we have in the world are available.
And what it also does, it frees up, you know, purely donor funds, philanthropic funds, for much harder, you know, problems that we need to deal with - for example, orphans, you know, from HIV, you know, AIDS families, the mentally challenged, other places where charitable, you know, dollars would need to go because for-profit dollars may not, you know, actually go there.
And I think that's the important point. Now, on a personal level, you know, Mohammad Yunus definitely has the moral leadership. He has done, you know, outstanding work. I have great respect for Alex as well. And in my own case, you know, on a personal level, I've been in the field of development for 20 years. I started as a volunteer, you know, working for $25 a month.
But I don't think that's relevant. I think the point is: What model of microfinance will actually reach out to the largest number of people the fastest way, and this is where I think the for-profit model, you know, really has an opportunity to complement the great work that, you know, Professor Yunus and others have done in the nonprofit space.
The fact is, we need much more, and we need it to be done very fast.
CONAN: The concern, and I don't again, would not put words in Alex Counts's mouth. But the concern is that sometimes profits become the goal, as opposed to the goal of eradication of poverty.
Mr. AKULA: Well, I think there's a distinction that one has to make between sort of what happens in theory and what's actually happening in fact.
You know, Neal, you had started with the question of, you know, wouldn't competition bring down prices over time. And in fact, that's exactly what we're seeing in India.
If you look at SKS, we were, at one point, as high as 40 percent interest when we started out, because we needed to charge that much to break even. We've lowered it to 31, 27 and now 24.5 percent. And what's interesting is at the same time, our return on equity went up from five to 12 to 18 to 21 percent, where it stands now.
So the actual history, the actual facts that suggest that competition does lower price over time, you know, as you get more and more, you know, players in, and simultaneously because of our volumes and our efficiency, you can actually provide even greater, you know, shareholder return.
I think the real question to ask is: Look, if the market works for the middle class, it works for the wealthy, if competition gives choice and, you know, better pricing, why should the poor have anything less?
CONAN: Well, let's bring some callers into the conversation, 800-989-8255. Email us, firstname.lastname@example.org. We'll start with Anguson(ph) - Anguson, I hope I'm pronouncing that correctly, in Sacramento.
ANGUSON (Caller): Yes, you did. Neal, by the way, this is a very great show. I do have a question to the gentlemen who are (unintelligible) the business or the management level in India. Isn't it like 30 percent interest rate - I guess I will be exact, around 26 or 27 percent interest rate, would be kind of a rip off to the people who makes one dollar or less that one dollar a day?
And I guess his idea was this microfinancing, nonprofit microfinancing, can't work at the larger scale in poor countries. But I guess it can be the problem is that big institutions, such as the IMF, the World Bank or whatever, the host country, is not putting a lot of money.
My experience dates back in my native country, where you have microfinancing done especially to the disadvantaged mother, single mothers, and it transforms their lives in a very dramatic way.
CONAN: Well, let me put your question to Vikram Akula in a somewhat different form, and that is that there have been moves in various places, and you know this much better than I, to cap interest rates to prevent the perception that Anguson is pointing out, that this is in some way gouging.
Mr. AKULA: Right, and I know this is hard for us, certainly in the West, to grasp - how possibly can one give a 24 percent loan and, you know, to a poor person and have them actually, you know, turn this and actually make a surplus.
But the fact is that at the micro-enterprise level, there's extraordinarily high returns, you know, on investment to the poor, and this has to do with, you know, family labor that typically is used in micro-enterprises, and therefore the family labor is very productive.
And so you actually do get, even for those living in a dollar and two dollars a day, a loan at 24 percent gives them the capital to, you know, earn very high returns. And our study suggests, you know, annual interest, annual increase in income of 45 percent and above.
And I think the idea that, okay, well, you know, it's a dollar a day, should you be charging 24 percent, for the poor woman who's receiving the loan, it doesn't matter to her what the investors are getting. What matters to her is: Does that 24 percent loan work for her? Can she make enough of a return that, step by step, she's able to get out of get her family out of poverty? And that very clearly does take place.
I'll just make one more comment on this. Even if you compare it, let's say, with the Grameen Bank - you know, today the Grameen Bank is charging on its general loan about 20 percent. And unlike us, they have access to deposits, and therefore they have a slightly lower cost of funds. So they're, you know, roughly in about a 15 percent range over their cost of funds, five percent (unintelligible) cost of funds.
In our case, you know, our costs of funds are about nine, 9.5 percent, and at 24.5, we're roughly in the same range. So whether it's a for-profit model or a nonprofit model, in some ways we've ended up, you know, in the same place.
And I think Alex is absolutely right that if we were allowed to take deposits in India, you know, we would be in a position to probably have, you know, even lower rates. In light of this...
CONAN: I just wanted to bring Alex in on that point. From what you understand about the regulatory system in India, is are the rates being charged by SKS out of line, do you think?
Mr. COUNTS: Actually, no. In fact, SKS, we have some disagreements with their approach, but I would say that by global standards they are quite an efficient organization, pass many of those efficiencies on to the poor, and the trend is in the right direction. I think people are can afford those, running certain types of businesses.
But I do think there's a larger point, which is that, you know, there's in microfinance and outside of it, there's a lot of wishful thinking about people being able to make a lot of money and do a lot of good for the poor, and yet in reality there are not the accountabilities in terms of doing right by the poor, that there are in terms of making money.
And this is why we've, through Grameen Foundation, have been trying to take a model developed by the Grameen Bank, which we call the Progress out of Poverty Index, a kind of self-accountability tool for how the poor moving out of poverty. It is now the most widely used tool in the industry. We've long hoped that SKS would adopt it or any other tool that does the same purpose, and they've not elected to do that.
And I think you have to realize that it's controversial, as your - some of your callers have said, to charge the poor any interest in many societies, especially India. And if you're going to do that - and I think it's right to do that - you have to bear in mind that people are going to take a very close look, policymakers, the public, the media, at what you're doing, where the profits are going.
And in case of Vikram, according to analysis that I've seen, his own personal stock options, there something in the range of $60 million. And I don't begrudge him that - those resources at all, but it does provoke a kind of a backlash. And that backlash is right now threatening the microfinance sector throughout India. And it's something a lot of us are worried about. And we think it didn't need to happen if people had been a little more thoughtful about how they rolled out this model.
CONAN: And Vikram Akula, we'll give you a minute or so to respond to that. There have been difficulties in Andhra Pradesh and other places.
Mr. AKULA: Sure, there's definitely regulatory challenges today. You know, Neal, as you've alluded to, there's recently an ordinance that has been passed, you know, that effectively could have straightjackets microfinance. And Alex is quit right that a lot of this is motivated by the uncomfortability people have with, you know, earning profits or making profits while working with poor. And, you know, it's true that in many places people are comfortable with that. You know, we're hearing it on the show as well.
But that's not the right question. The right question is what works for the poor? And today, for example, you have nearly eight million households who we lend to. It's an unsecured loan, collateral-free. If they decided tomorrow not to repay the loan, there's nothing that we can do about it. You're not going to take someone to court for a $200 loan. But the fact is, they come back year after year and continue to do so. And they do so because it works for them.
So even though we may be uncomfortable with the idea of making profits from the poor, the poor, you know, by coming back year after year, by investing in their own businesses, are saying this is what they want. They want market-driven services that will give them the financial tools that you and I, you know, have come to take for granted.
CONAN: Vikram Akula, founder of SKS Microfinance, also with us Alex Counts, president and CEO of the Grameen Foundation. You're listening to TALK OF THE NATION from NPR News.
And let's go next to Catherine(ph), and Catherine with us from Bristol in New York.
CATHERINE (Caller): Good afternoon.
CATHERINE: I really think that the whole - the point that Vikram might be trying to make is that the idea if you're going to put all of this under the moral microscope, then what ends up happening is that what you want to do is you want to make it - everything completely and totally altruistic, which is a model that will not work.
So I believe the failure of microfinance will actually come because it is being put under a moral microscope. History will show you that everything that is completely altruistic - say the Catholic Church for example, very altruistic purposeful - also ends up being the most corrupt. It is the idea of good and bad and that dichotomy which actually undermines - it's when everybody can profit that things work. It...
CONAN: Well, let's bring that to Alex Counts. Is the more charitable version, the more altruistic version as efficient as the profitable version?
Mr. COUNTS: Well, you know, I think that there's a wide spectrum here. And I don't, you know, Grameen Foundation supports dozens of organizations doing microfinance around the world. Not all of them meet the standards of Professor Yunus in terms of him not owning a single share, using virtually all of the profits of Grameen Bank to either give dividends to the borrowers of Grameen Bank or to provide low-interest student loans and so forth. There is a range.
But I think at the end of the day, you know, microfinance organizations run like a business. Many of them are highly efficient, as efficient as SKS - and in fact, Grameen Bank, and by some measures more so. But I think, ultimately, you know, microfinance staff are paid. They're paid off in market wages.
But ultimately the question is, are you talking about a double bottom line business where one bottom line is related to financial efficiency and the other is around poverty impact, and you treat them both equally or in fact the poverty mandate more important by keeping the business case solid? Or is it a profit maximizing business, where the - and where you kind of hope that there's a positive impact from the poor, but there's no real accountability?
And that's the important distinction that we make. And I think there can be a broad spectrum from one side to the other. But ultimately, you have to ask the question, is this double bottom line? Are you - are really holding yourself accountable...
Mr. COUNTS: ...to solving a social problem or are you not?
CONAN: And I'll get a response from Vikram Akula in the context of this email from Doug(ph). The choice between nonprofit microfinance institutions that are limited in scale and efficiency and for-profits that are more efficient and reach more people is a false dichotomy, he writes.
Look at the example of Companion in the Balkans, in Mercy Corps banks in Indonesia and XacBank in Mongolia. Microfinance in the developing world can be profitable. It is all a question of where the profits go: back into the community or into first and second world shareholders' pockets? Personally, I hope we choice to reinvest back in the communities.
Is that the choice there?
Ms. AKULA: Well, I think there are, you know, as Alex said, there's so much that needs to be done that, you know, we think there should be many different channels. Let there be nonprofit microfinance. Let there be for-profit microfinance. You know, let as much work go on as possible. Let even those who are sort of extremely altruistically motivated give, you know, out of charitable dollars, zero percent loans.
But if you look at the scale that needs - that we need to do this, we need to tap into much more capital that exists. And whether that capital comes from, you know, the local community or comes from the First World investors, again, from the perspective of a poor woman, it doesn't matter to her. What matters to her, is she getting a Microfinance loan on time, is she able to run her small business and is she able to make a return for herself? Ultimately, that's the test...
CONAN: And I'm afraid we're going to have to end it there. We've ran out of time. But Vikram Akula, thank you very much for your time. Good luck with the book, "A Fistful of Rice." And also our thanks to Alex Counts, who joined us by phone from New York.
This is TALK OF THE NATION from NPR News.
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