SKS Microfinance is an Indian finance company that focuses on loaning money to the poor, in an attempt to grow the wealth of the lower-class citizens, rather than serving the wealthy. Vikram Akula is the former CEO of SKS, and realized the need for this niche organization when talking to poor women in India. The main target of SKS are the small Indian homemakers, who make menial wages, some living off less than $2 per day. Akula uses the story of a woman named Saryamma to illustrate the express goal of SKS. Saryamma lived in extreme poverty, to the extent that her husband had no other option but to enter into indentured servitude. The family desperately needed money, but had no other options. Saryamma then joined into a linked-payment program that was offered by SKS, which allowed her to take out a $200 loan to afford a buffalo. Because of this jump-start, she was able to increase the family’s wealth tenfold, and get her husband out of indentured servitude and her children to school for the very first time.
Why does Akula mention this story of Saryamma? He goes on to explain how SKS Microfinance started out as a non-profit organization, but didn’t really satisfy him in its capacity. Akula felt that changes were needed to effectively run his company, and reach the people he intended. In short, Akula posits that the only way for a microfinance company to reach the people that need it the most, on a large scale, is to run it as a for-profit company. Akula mentions the theory of Muhammad Yunus, who argued that microfinance companies should be considered “social businesses” that are “merely self-sustaining companies”. Akula didn’t believe that this would lead to much success, evidenced by the very few people that have access to these non-profit microfinance companies, compared to those that need them. To support this, Akula cites the 19% market penetration in an industry where 80% of companies are non-profits.
So, why aren’t these non-profit companies successful? Akula believes that there are limitations placed on those companies, ones that he didn’t want to deal with. The heaviest of which, lack of access to commercial funds, limits the scale at which these companies can operate and grow. Without this limitation, the high cost of handling millions of microtransactions and inability to create scalable operating systems (the other limitations cited by Akula) are solved, assuming the finances are handled correctly. To tap into these commercial markets, SKS had to be structured to promise investors high returns. A non-profit just can’t offer this type of deal, and therefore are not able to convince investors that it will be worthwhile, thus keeping their hand out of the lucrative opportunity that commercial funds offers. SKS Microfinance, however, decided to jump on this opportunity and explain how the impoverished offer an untapped market of entrepreneurship. Akula offered these investors high returns based on the scale that the microfinance company will be able to operate at. Seemingly, this argument seems to be without error, as the evidence points to the great need of commercial funds that can only be generated in a for-profit organization.
The second argument made by Akula he credits to the profit-making strategies of behemoth corporations like McDonalds and Starbucks. He argues that in order to create a business that is scalable, you must standardize everything. Akula explains how everything, from loan officer training to the denominations of payment, were standardized by SKS, much like the major corporations that define success in their respective industries. When making millions upon millions of microtransactions, as these microfinance companies are, simplicity is key to not only speed up the process, but also reduce the chance of error. Employee training is something that Akula highlights the effect of. When training these loan officers, all of which come from these poor villages of India, standardization is the only way to be successful. Many of these officers are unskilled or uneducated, or at the very least without applicable experience. In light of this, it’s clear to see that this situation requires extensive training. Akula boasts that SKS is able to take a training process usually lasting several months to less than two months. To accomplish this, training is standardized through modules that are highly simplified for the potential officers to digest and learn easily. SKS also pairs the theory modules with field practice in the same week, this way officers are able to gain real-world experience as they’re training to continually apply the things they learned in the modules. This allows older employees the opportunity to help the newer employees along the way and expedite the training process. From this perspective, Akula’s argument seems to be solid, and shows why SKS is growing so rapidly, while other microfinance companies aren’t.
The third argument Akula makes reflects an issue addressed in his first argument. The issue of funding also presents the issue of technology. In a time where technology is everywhere, it can be extremely beneficial for companies to invest in competent technology that will allow them to work at a higher rate than those that haven’t. If companies don’t invest in technology early on, they won’t be able to grow very quickly. SKS used their profits to invest in technology that allowed them to get away from the industry’s status quo of paper recording of transactions. Akula credits this to minimizing error by a low-skilled working class through digitizing the approximately 140,000 entries a loan officer must make per year. In fact, there was no software on the market that suited their needs, so they created it anew. This usage of new technology, especially using software that was specifically created for their company. I do agree with the assertion that technology is important for companies to invest in, but the way it is used is much more important than having the best technology. If companies focus too much on creating the best possible software to perfectly fit their company, it may end up being a waste of money if they could’ve used a much simpler software to achieve the same goal. However, if the need is realized early and there are no obvious alternatives, it really makes sense to invest heavily in technology that will improve the effectiveness of the company.