Pub Date : 2006
Countries : India
Industry : Banking
- Kofi Annan, United Nations Secretary-General
- Mission of SKS Microfinance
- VikramAkula, Founder, SKS Microfinance
VikramAkula (Akula), the founder of one of theworld's fastest growingmicrofinance institution (MFI), SKSMicrofinance Private Limited (SKS), was recognised by the Timemagazine in its list of 100 ‘people who shape our world' in 2006. For Akula,who had left his job as a consultant atMcKinsey to start SKS in India, the honour came as a recognition for thework done by SKS in providing microfinance to the poor in India, a country which is reported to have the highest number of operatingMFIs.Akula has been in the forefront of transformingMFIs in India frombeing niche businesses or charities into a serious and viable business sector
Microfinance and its Relevance to India
Microfinance has been defined by theWorld Bank as the “Small loans that help poor peoplewhowish to start or expand their small businesses but, are not able to get banks to lend to them.”4 These small loans, also referred to asmicrocredit, are provided to people lacking access to traditional financial institutions.
In developed countries, where the financial institutions have provided the vast majority of the population with bank accounts, it is possible to have access to innumerable sources of capital in the formofmortgage loans and consumer credit at reasonable rates. However, in developing countries, there has been lack of government initiative and regulatory framework to provide themasses with easy access to capital.According to The Economist, “Inmost developing countries, the barriers to providing financial services for themasses are all too clear. Inflation tends to be high and volatile; government is often incompetent; and the necessary legal framework for financial services is oftenmissing. Property laws canmake it impossible for poor borrowers to use assets such as their home as collateral for loans.”5
The traditional reason for the failure of development ofmicrocredit to the poor in the developing countries has been the assumption thatMFIs would not be viable businesses.MostMFIs have focused on providing subsidised loans to target sectors to develop sustainable institutions at the local levels to serve the poor. Such micro credit initiatives were mostly from the private not-for-profit institutions that did not insistmuch on repayment.
The traditional reason for the failure of development ofmicrocredit to the poor in the developing countries has been the assumption thatMFIs would not be viable businesses.MostMFIs have focused on providing subsidised loans to target sectors to develop sustainable institutions at the local levels to serve the poor. Suchmicrocredit initiativesweremostly from the private not-for-profit institutions that did not insistmuch on repayment.
However according to The Economist, “The easy answer, that people who have little money do not make suitable clients for sophisticated financial services, is atmost a half-truth.”6 It has been reported that the reason for failure of financial institutions to providemicrocredit has been corruption.According to aWorld Bank study in two states in India, where the financial systemis largely government controlled, “borrowers paid bribes to officials amounting to between 8%and 42%of the valueof theirloans.”7 Corruption undermines the confidence in the system and negates the access of capital to the poor. Strong correlation between lack of financial access and lower income necessitates the need for stronger financial systems to increase income levels.
1] “Quotes”, http://www.microfinanceindia.org/
2] “About SKS – Background”, http://www.sksindia.com/background.htm
3] “SKS Brochure”, www.sksindia.com/SKS_Brochure_2005.pdf
5] “The hidden wealth of the poor”, http://www.economist.com/surveys/displaystory.cfm?story_id=5079324, November 3rd 2005