Social enterprises aim to incorporate a social mission through commercial activities. Microfinance institutions are a well known example of social enterprise. While the microfinance sector was frequently considered as intrinsically responsible or ethical, recent events have questioned the legitimacy of the sector (Hudon and Sandberg, 2013). For instance, Banco Compartamos, the largest MFI in Latin America, has charged interest rates above 70% with return on equity consistently higher than 30% for many years. In April 2007, Compartamos completed an initial public offering and existing shareholders swapped 30% of Compartamos shares for more than $450 million (Cull et al., 2009), which ignited a global debate culminating with Peace Nobel Laureate Muhammad Yunus’ accusation of “money laundering” against Compartamos managers.
This raises a fundamental question on the level of profits that are fair or acceptable for social enterprises. Can social enterprise simultaneously make substantial profits and serve the poor? MFIs are an example of hybrid organizations that combine multiple institutional logics, i.e. development or social logics and the market logic of profits (Battilana and Dorado, 2010). The pricing of microcredits is a key management decision for MFI managers. Setting interest rates has financial implications since it is a key source of revenue but also carries some ethical dimensions since microcredit clients are poor. Pache and Santos (2013) argue that the banking logic requires profit-maximizing interest rates while the development logic suggests low interest rates for poverty alleviation. Balancing the two goals is obviously challenging.
Most papers on ethical debates for hybrid or double bottom line organizations address pricing in these organizations, such as interest rate fairness (Rosenberg et al., 2009; Sandberg, 2012) or how harmful recovery practices can push clients into dangerous situations (Harper, 2007; Hulme and Arun, 2011). Literature is however relatively silent on what constitutes a fair profit for hybrid organizations. In this paper, we address the ethical debate of profitability in microfinance. We focus on MFIs that have been able to break even and generate profit and discuss the level of this profit. Indeed, there lies another key question: to which extent can we say that profitable MFIs remain true to their original double bottom line objective.
We classify MFIs based on four criteria. The first element is the margin between revenues (or pricing) and expenses. We assume that MFIs with the highest ethical problems are those charging high prices compared to their operating structure (Hudon and Sandberg, 2013). The second dimension is the price that borrowers have to pay for microcredit, the absolute value of the interest rate. The third dimension is the profile of the clientele, the poverty outreach of the organization. The fourth dimension is the distribution of the surplus generated by the MFI, the extent to which they favor their clients when they generate some additional margins.
Estimating “fair profits” in microfinance is far from easy. However based on the criteria we suggest, we can visualize two “key exemplary cases”: on the one hand, a fair MFI (in terms of profits) has a cost structure under control (to avoid inefficiencies), charges interest rates that allow to cover its costs while making a relatively low margin. This margin is not be fully absorbed by shareholders but benefits to the various stakeholders with a special dedication to giving higher support to the poorest customers. On the other hand, an unfair MFI can either be inefficient or efficient but it charges high interest rates in order to cover up its inefficiencies or to generate huge margins. Of course, very few institutions will perfectly match those “clichés profiles” and many cases will be in between. However, we believe that using this four-dimension approach could help structuring the debates that boards, investors and donors should have about what is an acceptable level of profits in microfinance.
References
Battilana, J. & Dorado, S. (2010). Building sustainable hybrid organizations: The case of commercial microfinance organizations. Academy of Management Journal, 53(6), 1419-1440.
Cull, R., Demirgüç-Kunt, A., & Morduch, J. (2009). Microfinance meets the market. Journal of Economic Perspectives, 23(1), 167-192.
Harper, M. (2007). What’s wrong with groups? In T. Dichter, & M. Harper (Eds.), What’s Wrong with Microfinance (pp. 35-49). London: Practical Action Publishing.
Hudon, M., & Sandberg, J. (2013). The ethical crisis in microfinance: Issues and findings. Business Ethics Quarterly, 23(4), 561-589.
Hulme, D., & Arun, T. (2011). What’s wrong and right with microfinance. Economic and Political Weekly, 46(48), 23-26.
Pache, A. C., & Santos, F. (2013). Inside the hybrid organization: Selective coupling as a response to conflicting institutional logics. Academy of Management Journal, 56, 972–1001.
Rosenberg, R., Gonzalez, A., & Narain, S. (2009). The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?, Occasional Paper, vol. 15. Washington, D.C.: CGAP.
Sandberg, J. (2012). Mega-interest on microcredit: Are lenders exploiting the poor?. Journal of Applied Philosophy, 29(3), 169-185.
1. Concepts and models of social enterprise worldwide
Reichert_Profits_2017.04.30.pdf 