By Rodney Schwartz,

Yesterday’s Financial Times reported that Indian based SKS Microfinance was set to raise $350 million in an IPO, which would see the company sell a 21.6% stake in the company.  The plans of this firm, which is the largest in India, and backed by private equity investors, has renewed the debate about the morality of profiting from the poor, who make up the overwhelming majority of SKS’s clientele.

The uproar is similar to that which engulfed Mexican-based Compartamos, another profit-oriented microfinance lender – and on this occasion has pit microfinance pioneer Muhammad Yunus against former McKinsey consultant Vikram Akula, who founded SKS.  Regular readers of ClearlySo’s blog posts will be unsurprised to hear we do not find the activity inherently immoral, but the contrary – why?

Yunus’ argument is that the microfinance sector should not be commercialised.  He advocates professional and self-sustaining firms that lend as cheaply as possible to the sector, with profits that should be sufficient to fund growth, and capitalise firms prudently, but not to enrich shareholders.  He criticizes the profit-seeking microfinance firms as little better than the loans sharks their credits are replacing.

The latter criticism seems especially unfair.  The Indian microfinanciers have seen their loan books expanding at 65% rate over the last three years, according to the World Bank, and this is unlikely to have occurred if their offering was not attractive, at least relatively.  The FT reports that average loan rates are around 28%. That seems high when compared with market rates, but is far below that of loan sharks (whom credit is often used to repay).  Moreover, failure to pay a loan shark can be met with violence, while these are not the means of these microfinance firms.

It would be great if the needs of the poor Indians could be met completely by non-profit maximising investors, but this is simply not the case; if anything, the financial crisis is likely to dry up governmental sources of such capital.  Thus private capital is essential, at least at this time, and such capital has a price tag attached, which is at least a rate of financial return which is commensurate with the risk.  Thus the real choice in certain markets is between financing the poor at rates which seem to some to be a bit high, or that they have no access to capital, forcing them into the hands of loan sharks or imprisoning them in their poverty.

I would like to live in a world where public capital was sufficient to make it available to the poor at more attractive rates.  In our world, our political leaders have squandered much of our resources on items that seem far less worthwhile to me, but these choices have been made and we are left with the situation we have, not the one we might ideally want.

I also believe that if extraordinary profits are generated, entry into the market will continue and competition will force down rates to poor borrowers.  Let us bear in mind that it is within the last ten years that many British borrowers on their cards paid similarly absurd interest rates (yes – in excess of 25%) until competition made that unworkable.  Now perhaps rates came down too far and consumers over-borrowed, but an equilibrium is being established and these things take a cycle or two to settle down.

But, if in the meantime, some entrepreneurs and their private equity backers are providing a service that economically disadvantaged Indian (or Mexican) consumers desire.  So long as their disclosures are appropriate and their policies around ensuring debt repayment are non-violent, legal and ethical, I will feel fine if some get rich in the process.