Is Greed Good for Microfinance?

“Greed is good. Greed is right. Greed clarifies, cuts through and captures the essence of the evolutionary spirit” proclaims the character Gordon Gekko in the movie Wall Street. Milton Friedman, a Nobel laureate in economics, asked in a televised interview “Is there some society that doesn’t run on greed?” He went on to opine that “The world runs on individuals pursuing their separate interests…The only case in which the masses have escaped grinding poverty…is where they have had capitalism and free trade.”

So should we be shocked to see investors making millions from the IPOs of large microcredit enterprises such as Compartamos in Mexico or more recently SKS in India? The blog Philanthrocapitalism praised this development as “an important step towards fully engaging the mainstream capital markets in the fight against poverty.” Really? Now that donor funded non-profits have pioneered an infrastructure into the bottom of the pyramid, it’s okay for market-oriented lenders to exploit this access to the poor to provide financing at rates that will satisfy “mainstream” investors? I think Muhammad Yunus is spot on when he calls this development “pushing microfinance in the loan sharking direction.”

Mainstream capital is increasingly aware of the money to be made in the fight against poverty. In my last blog (July 20 below), I discussed how Wal-Mart is profiting from the IPO of Green Dot, the largest issuer of pre-paid cards for low income consumers. Gary Rivlin, a former journalist at the New York Times, has written a fascinating book, Broke USA, that shows how entrepreneurs have figured out how to get rich off the poor. All the big pay-day lender chains are publicly traded companies that seem to have no trouble funding their operations with loans from big banks too timid to lend directly to the poor.

What is particularly disturbing about the SKS IPO is the involvement of some directors and major donors of the non-profit Unitus. Apparently, while supporting SKS in its pre-IPO phase with funds donated to the non-profit, they set up a separate for-profit investment vehicle to invest directly into SKS and subsequently benefit from the IPO. We can debate the virtues and “rightness” of greed but one thing has always been clear—it tends to corrupt.

For-profit MFIs have an inherent incentive to push high cost debt onto the backs of the poor in the same manner as pay-day lenders. For this reason, the “social business” model espoused by Professor Yunus is a much better solution for increasing capital devoted to fighting poverty. His idea is that low income borrowers should be able to support a business run on the basis of “no-loss, no dividend.” If the poor have to pay the kind of risk premiums required to attract “mainstream” investors then they are no better off than borrowing from village loan sharks or pay-day lenders and their ilk.

The causes of extreme poverty are many and complex. Greed has certainly played a role. It’s hard to see how greed will end poverty. Frankly, it seems obscene to suggest that focusing on one’s individual self interests is a good way to help the poor and end global poverty.