Vikram Akula was a rock star at the last Davos. Not everyone thinks that he will be as sought after when the world’s elite political and business leaders meet the next time. The past shadowed Akula before the IPO of SKS, the micro finance organization he founded six years ago. In 2004, Mr. Akula submitted his 183-page doctoral thesis to the University of Chicago. It outlined the problems and the potential of the microfinance industry. It said that many organizations got it all wrong and ended up ignoring the very poor for the “middle and upper” poor. Six years later Mr. Akula is a millionaire. And after the recent public listing that made Akula richer by more than $100 million, micro finance as a development activity is now under heavy scrutiny.
Six years ago, only a few had heard about SKS. Comparatively, today its market capitalization is more than that of an old, mid-sized bank such as the Fed with a loan book that’s six times bigger than SKS. So, who are these guys? They borrow from banks at 13%, lend to the poor at 26-27%, spend around 8% to deliver the loans and land up with an interest margin of 5-6% — almost double the margin that banks make. In his interview with the Wharton Economic Forum, Akula argues that the allegations of exploitative interest rates hold little water. Retail bank loans and subsidized government loans, which reasonably charge between 7-12%, are more expensive for the poor because of auxiliary costs – travel, lost wages, bribes etc. Further, he avers that current Microfinance penetration is a meager 6% in India and has only reached 70 mn of the estimated 170 mn-people market. He estimates future micro finance demand in India to be US$40-50 bn.
As always, there are two sides to the argument. When someone talks of giving small loans to help poor villagers — people who have been exploited for centuries by local moneylenders — the individual is immediately on a high moral ground. It’s unacceptable when the same person cuts deal with...