Business Ethics

A Case study on working of

MicroFinancial Institutions in India

 GROUP 9
Vinod Gupta School of  Ritesh Sinha (09BM8041)
Management, IIT Kharagpur  Rohit Khandelwal (09Bm8042)

 Subham Chattopadyay (09BM8050

 Varun Bajpai (09BM8059)
 Structure

What are MFI’s ?

Our Case

Analysis of the case –

 Why this issue ?

 Identification of the ethical issues in the case
 Analysis of the concerned issues in light of various theories

Conclusion & Recommendations

 MFI’s

Caters financial services to the poor

Wide range of providers - Formal Service Providers

and Semi Formal Service Providers

Formal Semi Formal

• Specific banking related regulations and • Subject to general and commercial laws
supervision • Financial NGOs
• Development banks • Credit unions and cooperatives
• Savings and postal banks • Non-registered groups such as rotating
• Commercial banks savings and credit associations
• Non-bank financial intermediaries (ROSCAs)
• Self-help groups
Source:
WikiPedia
 HOW TOP 3 MICROFINANCE COMPANIES RAISED
FUNDS IN THE NAME OF POOR? – A FACT SHEET

45,000 women shareholders in the country’s top 3 microfinance companies

(Spandana Sphoorty, Share Micro fin and SKS Microfinance) have missed out
on the benefits of wealth creation
Poor and uneducated, were titular owners

Control and decision making lay with the promoters

Investors were mere rubber stamps, and they neither had knowledge nor a

voice
Reasons Could be –

 Transactions engineered by promoters

 Structure used to house shares owned by the poor
Source: http://epaper.timesofindia.com
 Unaware Investors
Economic Times – November 5th 2010
Analysis of the Case – Why This Issue?

It is a blatant violation of the biggest concern of financial

inclusion
It pertains to the rural section of Indian economy which

comprises of 70% of Indian population

MFIs have been alleged by media and the State for:

 Coercive Practices
 Lack of Transparency
 High Interest Rates

Source: Malegam Committee Report

Analysis Of the Case – Identification of Ethical Issues

Depriving Stakeholders of their Wealth Interest

Misuse of Shareholding Vehicle, MBT for this lopsided

promoter-poor women relationship

Raising free money in the name of poor borrowers via

grants from family, friends, philanthropic institutions,

NGO’s etc keeping them in dark
Allegation of violating all Corporate Governance norms
 Analysis of the Case – Analysis of concerned issues
identified

Stake Holders
The Promoters

The Women, the borrowers

The Investors - Philanthropic institutions, NGOs,

families and friends

Government – State , Central, Regulatory authorities

promoting Financial Inclusion

 Analysis of the Case – Analysis of concerned issues
identified

Theories to be used –

 Deontology Ethics - Kantian Theory

 Utilitarianism
 Other Normative theories – Theory of right, care & justice
 Ethics of the finance paradigm
 Deontology Ethics

Respect for persons

Any business practice that puts money on a par with

people is immoral
Revolving entirely around duty rather than emotions

or end goals
People should be end and not means to an end

Source:
WikiPedia
 Deontology Ethics

Remarks
Stakeholders Description (Our
Perspective)

The use and abuse of MBT by the promoters

Promoters Wrong
and individuals involved in MFI

From the perspective of the borrowers, they

Women Borrowers Can’t Say
were used as means to an end

From the investors perspective, they were

Investors duped in investing money, in the name of Wrong
the poor borrowers
The government regulations play a crucial
Government role in such a scenario – Malegam Wrong
Committee report
 Utilitarianism 

Greatest happiness for the greatest number

Idea that the moral worth of an action is determined

solely by its usefulness in maximizing utility and

minimizing negative utility

Source:
WikiPedia
 Utilitarianism

Stakeholders Description Remarks

Maximum good for Maximum people was not

Promoters achieved. Minority (promoters) benefited from Wrong
manipulating majority (borrowers)
The wealth created from the investments, in
Women Borrowers their name was not distributed, as they were Can’t Say
unaware of their rights
As an investor, the money given in form of
Investors grants, for the poor, didn’t reach them, defying Wrong
the sole purpose
The government regulations play a crucial role
Government in such a scenario – Malegam Committee Wrong
report
 Theory of Right

 Absence of prohibition against pursuing some

interest or activity.
 A person is authorized or empowered to do
something either to secure interest of others or to
secure one’s interest.
 Existence of prohibition or requirement on others
that enable the individual to pursue certain interests
or activities

Source:
WikiPedia
 Theory of Right

Stakeholders Description Remarks

It is duty of the promoters to respect the

Promoters Wrong
right of knowledge to Investors

Right to credit at an affordable cost, Profit

Women Borrowers Violated
Sharing

Right of knowledge – where the money is

Investors Manipulated
going

Mechanism for Reservation in SHG,

Failure of NREGA scheme leading to
Government Wrong
defaults, Duty to protect right to credit for
poor
 Theory of Care

What makes actions right or wrong

All individuals are interdependent for achieving their
interests
Those particularly vulnerable to our choices and their
outcomes deserve extra consideration to be measured
according to
 the level of their vulnerability to one's choices
 the level of their affectedness by one's choices and no one else's
It is necessary to attend to the contextual details of the
situation in order to safeguard and promote the actual
specific interests of those involved
Source:
WikiPedia
 Theory of Care

Stakeholders Description Remarks

It was necessary on part of the promoters

who were knowledgeable in this case to
Promoters Wrong
safeguard and promote the interest of
vulnerable borrowers as well as investors
Their deserved extra consideration to make
Women Borrowers their own choice of selling of shares and Violated
sharing of profit
They deserved to know what was being
Investors done with their money and how it was Manipulated
being used in MFIs Business model

Government Mechanism for transparency Wrong

 Theory of Justice

Liberty and Equality

Each person is to have an equal right to the most
extensive scheme of equal basic liberties - Right to
credit
Social and economic inequalities are to be arranged
so that (Rawls, 1971)
 They are to be of the greatest benefit to the least-advantaged
members of society (the difference principle)
 fair equality of opportunity – profit sharing

Source:
WikiPedia
 Theory of Justice

Stakeholders Description Remarks

Promoters Violation of the difference principle Wrong

Deprived of the opportunity of profit

Women Borrowers Wrong
sharing

The intent of achieving social and

Investors Manipulated
economic equality was not realized

Government Mechanism for transparency Wrong

 Ethics of Finance Paradigm

“All for ourselves, and nothing for other people”

Choice between selfishness and selflessness

Choice between Economic growth and welfare

Source:
WikiPedia
 Ethics of the Finance Paradigm

Stakeholders Description Remarks

In this case the promoters were the

representatives for the poor women (principal-
Promoters agent model), so they should have thought Wrong
about the wellness and good of all the
stakeholders while making decisions

Women Borrowers Deprived of the right of profit sharing Wrong

Investors Choice between selfishness and selflessness Wrong

The government regulations play a crucial role

Government in such a scenario – Malegam Committee Wrong
report
 Conclusions and Recommendations

Monitoring Committee

Transparency Mechanism from Regulatory bodies

for MBT functionality

Awareness among borrowers

Legal Support for such cases of swindling

Third Party Audit – Financial & Operational

Thank You !!!