Commercializing Microfinance

By Becky Myers, Kiva Fellow, Sierra Leone

For the past few weeks in Sierra Leone, I have spent time working with my microfinance organization to explore potential commercial loans. In today’s financial environment, where grants can fluctuate wildly and loans like Kiva’s are a rare gem, the organization is focused on scaling up its business. Unmet demand for microfinance services is quite large here in Sierra Leone. It is estimated that 300,000 potential clients exist throughout the country, and microfinance organizations have only reached 90,000 clients. And competition to reach these clients has been steadily rising, with well known organizations, such as BRAC and LAPO Microfinance Company, slowly moving into the country as players. Naturally, the organization has spent a lot of time thinking about expansion and reach and is continuing to explore ways to receive additional capital in order to remain competitive.

Ways for these microfinance firms to receive capital, via either equity or debt, is becoming an increasingly relevant theme. A need for some of these firms to meet unmet demand and remain competitive is practically imperative in the quickly growing world of microfinance. SKS Microfinance, India’s largest lender to the poor, recently had a controversial initial public offering in July. This company’s growth has ballooned in recent years, growing from 30,000 clients in 2004 to nearly four million in 2009. And loans outstanding have increased from $2.7 million to $491 million over the same period. ARD, on the other hand, is registered as an NGO, and is not currently regulated in Sierra Leone. ARD’s number of clients are currently greater than 15,000 and loans outstanding are roughly $6.3 million.

SKS justified this IPO by saying that meeting the huge unmet demand for microfinance, estimated at around $50 billion, is only possible by tapping into the commercial capital markets. Thus, profitability is crucial. Professor Muhammad Yunus, on the other hand, has been very vocal against the commercialization of the industry. He thinks that microfinance organizations should be a purely social business, aimed at reaching the poor without profiting at their expense. Even larger banks, such as HSBC, have spoken about making microfinance a mainstream business and offer services here in Sierra Leone. Having these large banks become involved in microfinance would certainly be helpful for scaling up microfinance services quickly, adding breadth and reach. But at what point do profits become excessive and how balanced is profitability with social goals?

Whether these changes lead to a positive or negative outcome for the industry, and ultimately the poor, remains to be seen. But it is tough not to wonder how many microfinance organizations, which have been in existence for decades and were founded to truly empower the poor, will continue to operate and evolve in the increasing commercialization and rapid growth of the broader industry.