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Past Issue • Jul-Sep 2011

Microfinance Lenders: To Profit or Not to Profit

Microfinance has been touted as an instrument that can raise the incomes of those living below the poverty line. But, can the Microfinance Institutes (MFIs) also make profit while “doing good?” Professor Krishnamurthy Subramanian compares the nonprofit and for-profit MFIs to examine whether profit maximisation by an MFI compromises on its social objectives.

In August 2010, Swayam Krishi Sangam better known as SKS Microfinance, a non-deposit-taking finance company, which is into the business of serving the financing needs of the poor in rural India, emerged as one of the most successful recent stories in the IPO market. Its public issue of stock amounting to `1653 crores, or $350 million was oversubscribed by about 14 times. The IPO's claim to importance stemmed from its clients – not from their elite status, but rather the opposite. SKS was set up as what philanthropists call a "social enterprise" – a business based on the concept of doing well by doing good. SKS clients comprised primarily of low-income women who take loans to support tiny enterprises like neighbourhood shops, poultry farms, etc. The loans SKS' clients seek are small – typically hundreds of dollars rather than many thousands – and the bank requires no collateral. It is a version of "microfinance", the idea associated with Muhammad Yunus and Grameen Bank of Bangladesh, winners of the 2006 Nobel Peace Prize. For Yunus, microfinance can unleash the productivity of cash-starved entrepreneurs and raise their incomes above poverty lines. It is a vision of poverty reduction that centres on stimulating self-help rather than direct income redistribution.

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