Debate: Should a microfinance institution be for-profit?

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SKS Microfinance IPO closed today with retail subscription at 2.75 times and HNI at 18.26 times. The QIB book which closed on Friday got subscribed at 20.3 times, taking the overall subscription to 13.6 times.

The IPO of SKS Microfinance has triggered a debate with the microfinance sector on what the goal of an MFI should be. Should an MFI be for-profit or should it be a non-profit venture?

In an interview with CNBC-TV18, Deval Sanghavi, Founder, Dasra; Anna Somos Krishnan, Executive Director, Planet Finance India and Ramesh Ramanathan, Co-Founder of Janaagraha shed light on if MFIs should be for-profit or not-for-profit ventures.

Below is a verbatim transcript. Also watch the accompanying video.

Q: We have heard Muhammad Yunus for instance come out and criticize the fact that SKS Microfinance has decided to tap the capital markets. Do you think this is fair criticism?

Krishnan: The debate is not really about whether to go public or not. The debate is much more of what kind of message it sends for a sector as a whole in India. We know that there are really heated arguments for should it be for profit, should it tap capital markets or should it remain in the hand of the NGOs.

I personally feel there is nothing wrong with going to the capital market and doing business with the poor. The question rather here is what will happen to the Indian microfinance sector as a whole. Is it justified that SKS goes public, what will happen to the rest of the enterprises if SKS serves as a benchmark.

Now I can also substantiate these arguments with the fact that there are two concerns. One is the short term versus the long term view of MFIs. Should you concentrate on the short term profits or should you rather go in search of customer value.

I am not personally convinced that currently in India the right debate is in focus. It is not about bashing SKS, it is not about whether to go public or not, it is about what kind of governance standards accompany this and what kind of systems and processes are supporting these public issues.

Q: What is your main concern at this point in time because when we speak with people who are in the business of development or looking after social enterprises a key concern for them is that you cannot depend on cheque book charity, you cannot depend on the generosity of a rich corporate for instance and if you need to scale up and you need to scale up significantly you need funds and then what's wrong with the social enterprise also developing a self sustainable business model?

Sanghavi: It's less about self sustainability in this case. But more about actually ensuring that you are offering value services to the poor at the best price possible. The issue that arises is many microfinance institutions in India and globally charge interest rates at 24% to 36% claiming that this is needed to deliver the business when you also have other micro finance institutions such as Basix or Mann Deshi who provide additional services with the profits they generate in order to upscale and upscale the women that they are giving loans to thereby creating stronger entrepreneurs in the community and reinvesting whatever profits they have made to actually take women out of poverty faster.

I guess this should be really the principle of investors in microfinance or social businesses for that matter, when they are looking less at social sort of benefits that they are going to get back with more the returns that these women and customers of these products will get at the cheapest rate possible.