Alumni Voices: Rashmi Ekka ’08

From time to time, Wooster alumni that are engaged in poverty reduction or social entrepreneurship will post to this blog. Below is a thought piece by Rashmi Ekka. Ekka graduated in 2008 with an economics degree. Her Independent Study empirically assessed the efficiency and profitability of microfinance organizations with a focus on group lending.  Rashmi’s goal is to create financial institutions that are both socially and financially sustainable. While at Wooster she received a fellowship to attend StartingBloc’s Institute for Social Innovation and also developed a plan to start a microfinance institution for Adivasi’s (Sanskrit for indigenous peoples). Ekka works in DC as a finance
consultant for an international development firm.

Mainstreaming Socially Responsible Finance and Balancing Mission Drift

In the last edition of the Economist, there was an article which proclaimed that financial innovation for the poor had a place in society.[i] For the past thirty years microfinance practitioners all over the world, starting from Bangladesh to Brazil have been building up the microfinance industry and have taken financial services to over 100 million poor people (more than half of who are women) who were thought to be “unbankable.”

In the first 20 years, most microfinance institutions were non-profit organizations. Their focus was more on achieving social benefits and not much consideration was given to rigorous business practices such as internal controls, risk management and achieving financial sustainability. Repayment rates were high (often in excess of 95%) but many institutions continued to depend on donor financing. Even so, with its growth the microfinance sector became very vibrant, with each country having its own unique challenges and corresponding innovations. In India, where democracy and civil society movements and organizations are firmly entrenched, microfinance took on the form of self-help groups where women organized themselves into small groups and started saving in a common fund and using the group to access credit. These groups then consolidated themselves into federations, further bolstering the institutional structure and the women’s economic power.

In the 90s, there was a push in the microfinance industry for increased financial sustainability. Policy makers in many countries caught up with the sector and put in place enabling microfinance policies including the opportunity to start offering deposit services. Slowly some of the best microfinance institutions started reaching scale and becoming financially self sufficient.

With the increasing popularity of corporate social responsibility, microfinance has become the best answer to socially responsible investment needs. Armed with remarkable social and financial returns, microfinance institutions make good candidates for formal financing through the global capital markets. On the other hand, the big investors have found out that social investing does not only earn them karma points which are well-respected in the financial industry but also the diversification in the portfolio has proved to be a good risk management strategy during the global financial crisis. Calvert Foundation’s Community Investment Notes (bonds) have performed very well during the crisis and now there are several opportunities for institutional and individual investors to invest in microfinance.[ii]

In business there are always trade-offs. With all this good news from the commercial investors, many microfinance practitioners are concerned that they might not be able to adequately balance their financial responsibility with their social responsibility. SKS India is one of the biggest and the most successful microfinance institutions in the world with over 5 million clients. SKS has attracted a lot of interest from investors and those who are in, are expected to make a tidy sum. SKS is soon expected to have its first IPO and many in the industry are worried that the microfinance institution might suffer from mission drift – i.e. become so commercially oriented that its social mission is compromised.

So where does Microfinance go from here? The microfinance industry and generally the social finance industry is in a good place to be. Many industry experts have already banded up together to ensure that microfinance remains a double bottom line industry, i.e. be socially and financially responsible.[iii] With the industry being so quick in addressing mission drift, as well as accessing global capital markets for finance, the microfinance industry should continue to grow at a remarkable pace, expanding outreach to the many poor who are still unbanked. The current size of the industry is estimated at $25 billion and the market demand is estimated at over $250 billion. Let’s hope that microfinance is able to deliver on its promise!