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The crisis facing microfinance

When I tell people that I am interested in microfinance I get mixed reactions and almost always a hint of scepticism.Those who work in NGOs tell me of the damage it has done to communities and others who work in corporate or multilateral institutions warn me to not get involved with some “sketchy” institutions.

The point is, microfinance, as an industry, sits between the charities and commercial entities and although, for some decades, it has enjoyed the support of both parties, its reputation has recently started crumbling.

The pioneer of microfinance, Mohammad Yunus, who founded the Grameen Bank in 1983 and won the Nobel Peace Prize, in 2006, aimed to provide access to financial systems for the poor, that would give them an alternative to the local moneylenders, who often demanded high interest rates and abused the borrowers because of their frailty.

Because the Grameen model of microcredit was so successful, many institutions adapted it to their local circumstances and that is approximately how the microfinance industry began spreading around the world.

But lately, those who keep up-to-date with the events in this sector refer constantly to “the case in India”, or the exit of Yunus from Grameen Bank and talk of the crisis of microfinance.

In 2010, in Andhra Pradesh, a region in India where 30 to 40% of the national microfinance portfolio is based, there was a scandal over suicides which were allegedly triggered due to people’s over-indebted situation with the local microfinance institutions (MFIs).

Some sources say it was seven; suicides others say 30 and it is not certain whether it was the media alone or the victims’ families who accused the MFIs of the tragic events.

These incidents coincided with one of the main MFIs operating in this region, called SKS Microfinance, going public, raising $350m in IPO and enjoying an exponential growth. In the midst of these events the Indian government decided to ban some of the MFIs from lending and became more hostile to the growth of the sector.

Yunus, in the same year was ordered by the Bangladeshi Central Bank, to step down from his CEO role in Grameen Bank because he was accused of charging high interest rates and “sucking the blood out of the poor”.

We are not sure where these allegations come from, for the interest rate Grameen Bank charges, is 20%, which is an average rate in microfinance. Also, the court hearing came at a time when Grameen had established successfully enterprises of its own and the national government had only about 10% of its shares.

Yunus had constantly challenged the Bangladeshi government and previously attempted to create a political party to fight corruption within the public sector; hence supporters of Yunus claim that this was the government’s revenge for his success and political involvement.

Needless to say, microfinance has its flaws. In recent years more investors have been attracted to MFIs, in order to help them serve more people, however, this has often translated to extreme profit-maximisation.

Andhra Pradesh was not the only region in the world where borrowers committed suicide and in fact there are some alarming stories of aggressive debt collectors in Latin America who torment borrowers with life threats.

Moreover, some MFIs do charge shockingly high interest rates that go beyond 30%, claiming that the risk and the operational costs for lending such small amounts to people in rural areas are very high. It seems that the rapid growth of this sector led to poor structures and some institutions shifted their aim in mainly making big profits.

That said, there are solutions available to help the reputational damage that microfinance is going through. Some MFIs around the world are indeed sketchy and would benefit from better monitoring.

As a result, some argue that there is need for more regulation but regulation is a controversial topic especially when MFIs are operating in places where the public sector is highly corrupt.

Another solution, would be to attract more investors from the third sector in order to avoid falling into the profit maximisation game. However, countries like India, ban NGOs from investing in MFIs.

Lastly, one of the most effective ways in making sure that the microfinance sector is kept safe from external pressures, is by starting to collect deposits from the borrowers. The tricky part of deposit collection is that institutions will have to be regulated by the government in order to facilitate the service and will need to expand their operations.

As a result, minor MFIs may not have the means to set it up. It is important to note, however, that collecting deposits would not only allow MFIs to be more self-sustainable but also offer the opportunity for their borrowers to access microsaving schemes, which recent studies proved to be one of the most sought-after services by the poor.

In all, the situation is bleak but it is recoverable. The irony is that the slight downfall microfinance is going through seems to be a result of rapid growth and abundant spotlight. With more and more MFIs commercialising perhaps there is a need to start differentiating amongst these institutions and for those whose main drive is profit, to state their goals clearly, so that borrowers and investors know what they are truly dealing with. After all, with money comes interest and with interest comes politics.

Ayako Iba

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