This is the third part of a three-post series on commercialization in microfinance. Read Part 1 and Part 2.

Commercialization Will Help Microfinance Survive In the Capitalist Market System

Profits serve as an added incentive to for microfinance providers to operate in the sector. Professor Yunus points out in his first book, Banker to the Poor, markets cannot survive without certain capitalist tools; hence, the profit maximization principle can be replaced with two goals (the double bottom line):

• maximized financial returns (not necessarily indicative that MFIs should go the IPO route), and
• social returns through corporate social responsibility, subject to the condition that profit cannot be negative.

The Double Bottom and Microfinance

Following the drift of the last point, some may feel that commercialization is justified if MFIs adopt the double bottom line; logic suggests if an MFI measures both financial and social performances, it will prevent a mission drift.

But is it really a double bottom line?

The Wall Street Refugee Blog discloses the harsh reality. Fennie Wang recently met Jean-Philippe (CEO of Blue Orchard, a leading Microfinance Investment Vehicle), who is a proponent of profiteering off the poor provided the social mission is adhered to, and asked how he measured the performance of his portfolio analysts.

…Were they measured solely on the financial performance of their portfolio or also on social impact of their portfolio? He said that the team is evaluated as whole on the financial performance of their investments and while they do not evaluate the team based on social impact, everyone who chooses to work for his company is already dedicated to doing social good, not making money. Otherwise, they would have chosen a regular finance job.

(She observes) Intent is fine. Measurement is another. By the same token, if a portfolio analyst chooses to work for a Wall Street firm, then surely he is already dedicated to making money. So why bother measuring the financial performance of his portfolio? As anyone who has worked on Wall Street knows, that logic just doesn’t fly.

Of course, many commercial MFIs may actually measure their social as well as financial returns. And even in that case, there is a lack of consensus about the best technique – transparency and accuracy are two major hurdles. For this purpose, the SPTF recently released a comprehensive set of social performance indicators that MFIs can measure to determine the extent of their impact, but following these guidelines is entirely a matter of choice for microfinance managers.

Ironing out gray areas in this debate

Having looked at various arguments for and against the idea of commercialization of microfinance, it is now pertinent to simmer down the debate to a few practical compromises.

• If social and financial objectives are combined, the former should be an MFI’s first priority
• A variety of social performance metrics should be used to ensure for-profit MFIs deliver promised social returns
• Commercial funding sources do not necessarily need to involve equity ownership; BRAC’s debt securitization in 2006 presents a safer alternative because there isn’t any external pressure to maximize shareholder wealth.
• The microfinance model should be such that any profit directly help the clients (similar to cooperatives).
• IPOs may not necessarily be harmful, but they should preferably be the last resort for MFIs seeking to raise funds.

This concludes the series on the commercialization of microfinance. Do read a related article about profit-motivation in microfinance at the Kiva Blog.