Corporate & Securities Law

Capitalism as a solution for poverty

SKS Microfinance, India’s largest microfinance lender, did a $354 million IPO Wednesday. This may encourage others to do likewise. The result would be much more money for very small loans. Sounds good, but it’s meeting objections:

A publicly traded company’s traditional obligation is to make money for its shareholders, while the mission of microfinance ? loans typically under $200 for starting businesses that banks won’t make ? is to lift people out of poverty. Some say those are irreconcilable objectives.

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“This is pushing microfinance in the loansharking direction,” Muhammad Yunus, who was awarded the Nobel Peace Prize for his work at established microfinance lender Grameen Bank, told The Associated Press. “It’s not mission drift. It’s endangering the whole mission. “By offering an I.P.O., you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me,” he said. “Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people.”

The for-profit and non-profit models would compete for business. The question is whether poor people should be able to decide whether to borrow money on the terms that capitalists want to loan it (assuming consumer credit regulation allows this) or on the terms that non-profits want to loan it. Chances are there will be more money available to poorer borrowers but on more onerous terms, reflecting the greater risk of the new borrowers that are brought into the market.

Who should get to decide whether poorer borrowers get their opportunities to become entrepreneurs: charitable donors, government regulators or markets? I have contributed to Grameen because I think it’s a worthy cause, but I would also buy SKS stock if it looks like it could succeed in the market. Where is the conflict?

Full post as published by Truth on the Market on July 29, 2010 (boomark / email).