SKS is like any other healthy high-growth business, except that our customers have almost no money. Consider the
plight of Saryamma: She and her husband were landless laborers who earned
about $1 a day. Persistent drought often
made work and food scarce. Saryamma’s
husband entered into bonded labor, a
form of indentured servitude that still
exists in India, just so the family would
have enough money for grain. Her oldest son was forced to seek work rather
than attend school.
In 2002, Saryamma joined our program and recruited four other women
from her village who wanted loans. In
line with our group-lending model, each
loan was linked to the others: If one
woman couldn’t pay her small weekly
installment, the rest of the women
chipped in; if she refused to pay, the others pressured her into meeting her obligation. Saryamma initially borrowed
$200 to buy a buffalo so she could sell
the milk. She took one year to repay, in
weekly increments of $4.50. In subsequent years, she took out other capital
loans, eventually adding three more buffalo, a cow, two acres of land, and a pair
of bulls to her portfolio. Her family’s net
income has increased to $10 a day, propelling her firmly into India’s lower middle class. Her husband is now free from
bonded labor, and Saryamma’s youngest
children are the first in the family to attend school.
Saryamma’s story illustrates that providing loans to women is a sure way of
making microfinance work. Studies have
shown that women are more likely than
men to reinvest profits in the household
and to support others in their borrowing group. That’s why we lend only to
women.
How do we manage to help women
like Saryamma on such a large scale?
From the beginning, SKS’s deliberate
strategy has been to bypass the usual
conventions of poverty-eradication programs. By reenvisioning microfinance,
we have achieved excellent customer
and business relationships throughout India.
ARTICLE AT A GLANCE
Q Vikram Akula’s $250 million
firm applies for-profit principles to the world of microfinance – accessing commercial
capital, standardizing products
and processes, and embracing
new technology.
Q The company unfailingly does
what’s best for customers,
even if that undermines the
firm’s short-term interests.
Q The result: a rapidly growing
customer base, now over
2 million strong, and a solid
brand to leverage with
partners.
Rethinking Microfinance
A fatwa is hardly the only scary thing
my company has encountered on its
path toward rapid growth. Much more
worrisome is the slow rate at which our
industry has been able to gain traction
and deliver broadly on its promise.
Microfinance is often lauded as the
solution to poverty. Borrowers include
agricultural laborers, mom-and-pop
entrepreneurs, street vendors, home-based artisans, and small-scale producers, each living on less than $2 a day.
They are quintessential base-of-the-pyramid customers – the potentially
lucrative market segment that University of Michigan professor C.K. Pra-halad has so famously drawn attention
to and that many companies have had
trouble reaching. (See his and Allen
Hammond’s “Serving the World’s Poor,
Profitably,” HBR September 2002.)
The simple notion of microfinance–
providing business loans of as little
as $100 or $200 to the poor – was pioneered in 1976 by Muhammad Yunus,
who founded Grameen Bank, won the
Nobel Peace Prize, and is a personal
hero of mine. No doubt, microfinance
has benefited people like Saryamma
tremendously, but the model just hasn’t
managed to scale to large numbers.
Most microfinance institutions worldwide are small nonprofits; about 80%
serve fewer than 10,000 customers.
While the industry celebrates having reached about 140 million people,
roughly 3 billion (or 750 million households) still live on $2 a day or less. In
terms of households, that’s only a 19%
market penetration – a sure sign of un-derperformance in any other industry.
Microfinance firms haven’t succeeded
in helping as many customers as they
would like for several reasons: their lack
of access to commercial funds, the high
cost of handling millions of microtrans-actions, and an inability to create scalable operating systems. I first learned
about these limitations in 1995, when,
after graduating from Yale with a master’s degree in international relations,
I became a loan officer for the Deccan
Development Society (DDS), an NGO
that extends microfinance loans in India. One day, in the course of my normal
rounds, an impoverished woman from
Kusunoor, a remote village DDS wasn’t
serving, asked me, “Can you offer loans
in my area?” I passed her inquiry on to
the NGO’s directors. Their response was
both a refusal and an excuse: The grant
cycle was ending, and DDS could not expand beyond the 100 villages it was then
serving. I shared that with the woman,
and I will never forget her reply: “Am I
not poor, too? Do I not deserve a chance
to get my family out of poverty?” I realized then that to truly use microfinance
to help eradicate poverty, we would
need a new model, one that would allow
microfinance organizations to scale up
quickly so that we’d never have to turn
any poor person away.
I launched SKS in 1998 to build that
next-generation microfinance company.
I remember early on walking down a
dusty road in a remote drought-prone
region of India, looking for potential
customers. I turned a corner and came
upon a group of women in bright-colored saris sitting in front of thatched
mud huts. I approached and explained
that I was starting a microfinance program and could bring collateral-free
loans right to their doorstep. “You can
start small businesses and get out of poverty,” I said. The women met my pitch
