There is a major positive change starting to ripple through the microfinance industry … the trend towards running microfinance institutions (MFIs) as for-profit businesses rather than non-profit charities. Today, The Wall Street Journal ran a front page article on this trend highlighting a for-profit Indian MFI, SKS, which I have visited in Hyderabad last October. Unitus, a microfinance venture capital non-profit, was very instrumental in enabling this new direction for SKS and is an early equity investor in SKS.
This trend is incredibly good news for the poor! Why? Here are a few reasons:
- For profit MFIs are much more likely to continue operating for the long haul … which means that they will continue to be servicing the poor when the donated funds for non-profit MFIs move on to the next interest.
- For profit MFIs are forced to operate efficiently in order to create a profit. This means that they need to create an ongoing operational efficiency culture. Over time, (sometimes even short-term) this means that the cost savings can be passed along to their poor clients in the form of lower interest rates or fees.
- For profit MFIs are forced to be more transparent with their governance. Generally, this is forced upon them by regulation and their investors who want to see how their money is being used and to reduce the possibility of fraud and mismanagement. A more transparent, healthy MFI is likely to receive better rates on loans from banks which lowers their cost of capital which over time can (and will due to competitive pressures) be passed along to poor clients.
- For profit MFIs can accept equity capital. That is, investors can buy shares in a MFI. This provides very inexpensive and flexible capital for the MFI which enables them to make forward-looking investments in staff, systems, expansion and other things which enable them to grow and expand. And, unlike loans, the MFI doesn’t have to pay back this capital or pay interest! Additionally, equity capital can be leveraged to enable them to borrow more money from banks which is then lent out to poor clients. So, the net benefit to poor clients is more loan money at lower interest rates.
- For profit MFIs are much more likely to focus on their poor clients as “customers” vs. beneficiaries. That means that they will care about things like customer service and creating financial products which work best for their poor clients in order to retain their customers over the long-term and help their customers be successful. This potentially is one of the greatest benefits to poor clients as their needs change and evolve.
What are other benefits of a for-profit vs. non-profit? What are the downsides of a for-profit? Please post as comments.