New & Noteworthy
7/29/10: The SKS IPO – Using the Capital Markets to Fight Poverty
This week, SKS, one of India’s largest and most successful microfinance institutions, is issuing shares on the India stock exchange in one of India’s – and the microfinance industry’s – most talked-about IPOs.
We believe that this IPO will ultimately prove to be an historic milestone for the poor in India and beyond, opening the door to assistance on a scale never before seen in the region. In fact, the impact of the IPO goes well beyond SKS itself, demonstrating the role that capital markets can play in fighting poverty.
Microfinance today reaches approximately 150 million people worldwide, but we estimate that as many as 1 billion or more – many of them in Asia – could benefit from it, provided they had access. As microfinance practitioners, investors, donors or simply concerned citizens, the question we need to be asking is, how can microfinance benefit the greatest number of people at the lowest sustainable prices in the quickest possible time? This is surely the question most relevant to the poor.
To achieve genuine impact, a group of institutions, not just one or two, are needed in each market – institutions whose competition will expand coverage faster than any single entity ever could, delivering a more diverse suite of appropriate products at the lowest price. We have already seen this happen with microfinance in Latin America. The SKS IPO will, we believe, continue to draw more interest, and more investors, into microfinance, helping to build a wholly new industry dedicated solely to meeting the needs of the poor.
To make lasting progress in the fight against poverty, of course, many high-impact interventions need to work in unison – healthcare, education, housing, nutrition, clean water and sustainable energy, to name just a few. Financial services are just one portion of the solution, and we must be measured about our claims for the role that microfinance plays in alleviating poverty.
We also need to build trust and ensure that microfinance organizations protect their clients. Microfinance requires strong consumer protection standards, such as those articulated in the industry’s new Smart Campaign for consumer protection in microfinance. Key among the campaign’s principles is responsible pricing, which allows institutions to be both sustainable and as affordable as possible.
But, above all, we need to be ambitious. Successful new industries are built when a new activity is capable of generating superior, not average, returns. This is what motivates entrepreneurs to venture into new fields, allowing them to reinvest and grow rapidly – SKS has reported that it will use the sale proceeds to meet capital requirements being fueled by growth – and encourages capital markets to assume the risks of an emerging opportunity.
That the power of finance can now be unleashed to help transform the lives of the poor is the true value of microfinance IPOs.