Can Profit-Seeking Benefit the Poor?

Can Profit-Seeking Benefit the Poor?

Almost all microfinance borrowers are women who utilize funds obtained to start and maintain small businesses, such as broom making. Photo: <a href="http://www.flickr.com/photos/michaelfoleyphotography/2048141649/">Michael Foley Photography (flickr)</a>
Almost all microfinance borrowers are women who utilize funds obtained to start and maintain small businesses, such as broom making. Photo: Michael Foley Photography (flickr)

Of the three main microcredit models; non-profit, commercial, and regulated full financial services, which is best equipped to help the poor?

The Clinton Global Initiative invited three heavyweights from the microfinance industry to debate this very question: Nobel prize winner and Grammeen Bank founder Muhammad Yunus, SKS Microfinance founder Vikram Akula, and Mary Ellen Iskenderian, the president and CEO of Women’s World Banking. You can listen to Planet Money's distilled version of the conversation below.

Yunus presented an argument against the profit-maximizing, commercial approach, contending that rich investors seeking profits should not be allowed to usurp capital from the interest payments of the poor. He argued:

Grameen Bank is a for-profit organization…We are not NGO, we are a bank. But ownership is the question. Grameen Bank is owned by the borrowers. So we make profit, profit goes back to them. So we protect that part. So what we are opposed to when you say profit or commercialization, it’s money of the poor going out to somebody else.

In contrast, Akula alleged that the only way to extend microcredit opportunities to as many poor people as possible is to follow a commercial model:

Women from more remote areas would often come and say ‘Can you start in our village?’ and we’d always have to say ‘No, you know, it’s grant run and so we don’t have funds,” and we’d have to turn them away and they’d walk away disappointed… I left my NGO and came up with the idea of using a highly commercial model so that you could access capital markets and go back to that [poor] woman or any poor woman anywhere in the world and say ‘Yes, you too can have an opportunity.’

The other panelist, Iskenderian, advocated extending full financial services to the world’s poor. She reasons that the poor need access to regulated, commercial institutions that provide credit but also accept deposits and protect assets. However, she acknowledges the difficulties of becoming a “microbank,” specifically that laws often prevent the formation of such institutions and that it is extremely expensive to run them.

In The Wealth of Nations, Adam Smith first articulated the notion that firms acting in self-interest and profit-maximization would unintentionally produce socially beneficial outcomes. But is it the best way to prioritize the needs of the poor? You decide.

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