Wednesday, November 10, 2010

Finally the word is getting out about what microfinance is all about?

For the past 7 years or more, I have been speaking out and writing a number of articles and blogs on the misleading impression being created by microfinance firms on their alleged contributions to poverty reduction (see my December 2006 blog entitled “Social Entrepreneurship as Poverty Solution”). I have pointed out that microfinance loans are rarely made to the poor (those falling below $2 per day – the broader World Bank definition for poverty), the interest rate charged is often exorbitant, only a small proportion of poor borrowers with other support mechanisms are able to start and sustain any new business with such loans, the collection practices are unethical, if not illegal, and often these loans cause recipients to fall into greater indebtedness. I have been discouraged by my inability to convince others on my observations, as more and more powerful institutions including the World Bank, the United Nations, and hedge fund/private equity firms joined forces with many of the micro-lending institutions. Recently, one Indian microfinance firm executed an IPO yielding tens of millions of dollars to its founders and one of its financial backers.

However, in the past few months, we are seeing some truth trickling out about microfinance. One such article by Milford Bateman on the Andhra Pradesh Microfinance Crisis in South India dated November 8, 2010 appeared in the online service www.Indiamicrofinance.com. To quote the opening paragraph of the article: “What is happening in AP today is an economic, social and humanitarian disaster. Mounting individual indebtedness in the poorest communities (largely thanks to the ease in obtaining multiple loans), artificially inflated and distorted local economies (many inflated into nothing more than giant bazaars and permanent street sales), spectacular levels of profiteering by the CEOs and key private investors attached to the main MFIs, increasingly aggressive loan recovery techniques, and growing numbers of reports claiming multiple cases of suicide that apparently directly followed on from such aggressive loan recovery techniques (see Microfinance Focus Serp Report ).” I don’t need to explain this further.

MFIs have succeeded in convincing many investors and donors that they are social entrepreneurs helping to reduce poverty. By redefining the “bottom of the pyramid” to include those earning up to $10 per day (almost 90% of India’s population), loans made to small business in the middle income range are classified as loans to the poor. Many small businesses are unable to obtain bank loans, and hence, they are desperate enough to pay 24% or higher interest rates from MFIs. It appears that MFIs are able to lend at far higher interest rates than those charged by commercial banks – double the rate or more --, and use pressure tactics to accomplish loan repayment rates of 99% that they claim.

Let me conclude by pointing out that there is no easy way to reduce poverty. There are no shortcuts. It is simply unrealistic to expect uneducated poor women to start and sustain business with $100-$200. Interest rates over 24%, and in some cases close to 100%, charged by MFIs make it simply impossible for anyone to repay without falling into greater indebtedness.

The problem of poverty is complicated and solutions are mostly longer term and multi-dimensional. Micro-lending as practiced today does not contribute to poverty reduction.

Abraham M. George
http://www.shantibhavanonline.org/

Dr. Abraham George is the Founder of Shanti Bhavan School (www.shantibhavanonline.org), a world-class institution for children from socially and economically deprived families, and the Indian Institute of Journalism & New Media, in India.


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