The Profit-Motive in Microfinance: Who Gets Left Out?

A woman in one of the slums that we visited offers chai to us.

A woman washing clothes in one of the urban slums that we visited.

What a typical neighborhood of a Sahayata client looks like.

A Sahayata client shows us her cloth shop, which she was able to expand through her Sahayata loan.

The non-profit that I am working with is an offshoot of the microfinance institution Shree Hari Fintrade Private Limited, which operates under the Brand name Sahayata. Founded only two years ago, Sahayata now has twenty-one locations in Rajasthan and is aiming for a total of three hundred branches throughout India by 2010. The six founders of Sahayata hold impressive resumes and bring a wealth of experience from working in multi-national corporations outside of India. The MFI claims to be adding more than 4,000 customers a month and expects even greater growth as it expands to more locations.

While Sahayata’s growth plan and execution are impressive (loan officers text collection figures from the field to a software that automatically compiles data from all branches and generates a report on excel), its focus on rapid expansion makes loan officers leery of lending to those at the very bottom of the income bracket. With huge targets to reach, the branch managers place their energy into increasing collection amounts. It is Sahayata’s policy to lend only to women who are married, own their own house, and have their own business.

When speaking of alleviating poverty, it is important to define exactly what parameters qualify as “poor” and what constitutes bringing individuals out of poverty. The initial aim of microfinance under Muhammad Yunus’ Grameen model was to help those at the very bottom of the income bracket, who did not have steady shelter or businesses, obtain loans. Though the women who receive the 5000-10000 Rs loans from still earn far less than the average middle class Indian, it is clear that Sahayata is not by any means a poverty-alleviating entity by Grameen standards.

Our supervisor says that Sahayata loans to women in the slums, but it is evident that the definition of “slum” varies significantly here. He unabashedly rejects the idea of lending to those living under tin roofs in the slums because he believes that there is a slim to nothing chance that women in the slums will pay back their loans.

“Sahayata lost money last year. We cannot afford to take on such high risk, When Sahayata expands and is able to make a lot of money, only then can we consider loaning to the poor. We must be able to stand on our own before we can help the poor. We can’t be expected to simply give out of our pockets forever.”

The assumption here, however, is that the poor are not going to return their loans and that the MFI will automatically lose money if it lends to these poor. Muhammad Yunus’ Grameen model has proved this wrong. Isn’t it precisely because normal banking institutions will not lend to these people that MFI’s were created? When I mentioned this to my supervisor, he explained that the Grameen model is viable in Bangladesh only because most of the population in Bangladesh is at the same level of poverty, so MFI’s there are forced to loan to the poorest of the poor. In India, however, where there are many different levels of income, MFI’s do not need to loan only to the poorest of the poor.

What he seems to be saying is that because there is greater profit to be made by lending to other income brackets, it is only natural that for-profit institutions will automatically favor lending to those women over women from the lowest income brackets and with the least amount of job security and stable housing. From a business standpoint, Sahayata’s decision to loan only to women who are married and own their own homes and businesses makes sound financial sense. As a newly established MFI, Sahayata suffered losses last year and is therefore unlikely to take on a large amount of risk.

Does the profit motive always lead to the neglect of the poor? In this profit-driven, growth-oriented approach to microfinance, the most disadvantaged group is again left behind. Is the profit motive and the fact that microfinance has become a lucrative business model detrimental to the original intent of microfinance as a way to alleviate poverty? Should MFI’s follow the rules of the free market?

Without government incentives for corporations to serve the poorest classes, it seems very unlikely that corporations will be willing to take on such initiatives on their own. The alternative to corporations that operate only to generate profit is what Muhammad Yunus calls the “social enterprise,” which has the twin aims of profit and social impact as barometers for success. As such, Yunus explains that, “A social entrepreneur will continue to be in the market for as long as his or her socially beneficial enterprise is at least breaking even.”

However, unless there are policy changes on the macro-level that provide incentives for the development of more such social enterprises or that encourage the adoption of double bottom lines, goodwill alone will not be enough to alleviate poverty. And until then, it seems unlikely that MFI’s will direct their efforts towards loaning to the poorest of the poor.