SKS to IPO? The Double-Bottom-Line Debate
March 26, 2009 No Comments
The largest microfinance institution (MFI) in India and one of the largest in the world by most any measure, SKS Microfinance, has announced it is exploring the possibility of an initial public offering (IPO) sometime in 2010 (see full article for details). SKS has been expanding its coffers steadily alongside its client base since the firm’s inception in 1997. Most recently SKS closed a USD$75 million round of private equity funding in October of last year and has since expanded the scope of its services significantly. Its microfinance products now reach nearly four million Indian poor.
This announcement by SKS – now one of the world’s premier MFIs – of its IPO consideration touches upon a number of very interesting and particularly sensitive issues unique to the microfinance industry. Primarily it underscores the struggle ongoing between the two main camps of microfinance practitioners: the social and the commercial. It also emphasizes the current trend in the field toward commercialization which has been accelerating of late, though not without some degree of controversy.
Reference Compartamos Banco in Mexico, a purely microfinance organization which sold a 30% ownership stake through an IPO in 2007 and grossed over USD$400 million in capital for the firm at the time (see the CGAP page dedicated to this watermark transaction for more commentary and information). This decidedly commercial motion was pilloried by many microfinanciers – notable among them was Muhammad Yunus, the well-respected “Father of Modern Microfinance” – and the firm remains under some scrutiny today. Such outcry arose not solely because of Compartamos’ loan interest rates (occassionally upwards of 100% per annum) and profits (nearly $80 million dollars in 2008), but also because of the firm’s inauspicious, not-for-profit beginnings (the firm was initially financed through donor aid). Among other things, the IPO raised questions regarding the bank’s seemingly divergent allegiances to its clients – which demand the most effective and efficient products and services – and to its new public shareholders – which demand investment returns.
The somewhat vitriolic response to Compartamos’ success and its supposed profit-maximizing mentality is perhaps best understood within the historical context of the microfinance industry. Modern microfinance – which is really only about thirty years old – initially came into vogue as an improved means of poverty alleviation and economic development, not necessarily as a potentially profitable business sector. Compartamos’ commercial methods thus appear to cut at the industry’s roots, which are grounded firmly in this socially-minded ethos. However, since it turns out that microfinance businesses (like other financial firms) can yield positive returns for stakeholders the prevailing philosophy of social good is coming into conflict with the oftentimes contrary viewpoint of corporate welfare.
As is often the case with ideological conflicts, the issues at hand are hardly black and white. In fact, somewhat paradoxically, one of the overarching goals of the social microfinance sector is to foster and attain sustainable microfinance practices, and this goal is arguably best attained via commercialization. While Compartamos has clearly identified a profitable, commercial, and apparently sustainable means of microfinance product provision it appears nonetheless to have crossed a tacit line in the sand demarcating an acceptable level for MFI earnings.
All of this represents an interesting conundrum for SKS and other commercially viable MFIs: how can the pursuit of the capital necessary to expand products and services via an IPO, or any other commercial funding mechanism, be managed without incurring undue reputational damage, without compromising the social bottom line and without compromising profitability? This rather open-ended question underscores the delicate balance of interests to be maintained and raises a variety of issues related to corporate governance and business ethics worthy of further consideration and some concern.
Many MFIs have attempted to sidestep the debate surrounding the relationship between social mission and commercial practice via business plan hybridization. Such so-called “double-bottom-line” (DBL) businesses focus their attentions equally on turning a profit and fulfilling an identified social goal, such as client exodus from poverty. Some MFIs have proven remarkable successful at managing such oftentimes contradictory goals. However, even the most adept and seasoned DBL firms can find it difficult to strike a balance.
For example, while the criteria for profit measurement are relatively well established (excluding of course various mark-to-market discrepancies), the measurements of success for more intangible goals – such as poverty alleviation – are by no means consistent. The difficulty of promoting equal measurement increases across borders, cultures and products. This makes it even harder to express and evaluate with confidence the fulfillment of social objectives versus commercial ones. Regardless, without some form of quantifiable evidence in support of social progress, it is difficult for MFIs to contend one way or another for the advancement of their missions.
To this end it is exceedingly and increasingly important for MFIs to promote transparency and to manage donor, investor and client expectations openly. While profits are a necessary and acceptable part of conducting any kind of business – since they provide firms with a buffer against uncertainty or adverse experience and enable the sustainable long-term expansion of useful products and services – they must be collected and distributed reasonably. If commercial monies garnered are going to be used to develop more effective products or to expand their reach to the poor, it is important to make this intended capital usage clear. It is also important, throughout the course of present and future operations, for MFIs to demonstrate and rationalize how products are being priced both sustainably and with the best interests of their target clientele in mind. In this way, DBL businesses (or businesses operating in a DBL context) can distinguish themselves from their profit-maximizing brethren adequately and avoid the negative attention which can accompany the pursuit of traditional forms of commercial capital toward the fulfillment of social-mission-related objectives.
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