"So Uzair, I was going through the news and I saw that India’s microfinance loan portfolio is expected to grow at 10% -15%. Every time I hear about microfinance in the media, it’s portrayed as this magical solution to poverty but what is Microfinance?"
Yes Khushi, microfinance brings financial products and services to the poorest of the poor through different forms of contracts. Poor people lack funding which they would’ve otherwise used to innovate, grow and engage in economic activities. Commercial banks and mainstream financial institutions are not able to reach or efficiently provide to the huge section of society that needs small amounts of loans. The motive of microfinance institutions or MFIs is to target the poorest of the poor and help them alleviate poverty. Altruism is a constant feature of the psychology of donors for MFIs, ensures the sustainability of MFIs. Therefore, MFIs advocate for poverty alleviation through microfinance products, services, and programs like sanitation drive without them worrying about making profits or blindly expanding the reach.
"Sounds great. But is that all microfinance is about? It seems dependent on subsidies and donations. How is that financially viable in the long-term?"
No, there’s more to it. What I just explained is called the Welfarist or poverty lending approach of microfinance. As you rightly pointed out, this approach faces criticism based on its financial viability. However, MFIs need to be self-reliant and ensure their own sustainability and this approach is termed the Institutionalist Approach. The institutionalists believe that the lack of financial viability of the MFIs in the medium or long run would lead to the failure of microfinance programs and the demise of the new way to fight poverty. This rationale leads institutionalists to ensure efficiency and profitability in the MFIs, often at the cost of leaving out or “drifting from” the non-profitable, core poor clients.
"That sounds like a business model to me. They will leave out poor clients that are not profitable and don't care about those taking the loans. Won’t this lead to an increase in suicides and other problems?"
Yes Khushi, I am glad you pointed this out. Take the example of Andhra Pradesh, home to one-third of India’s $5.3 billion microfinance industry. A law has been enacted regulating the bullying debt recovery practices of some MFIs, which has supposedly even led to clients committing suicides. In racing towards being sustainable and profitable, MFIs have increasingly focussed on financial performance and neglected their declared mission of poverty reduction and empowerment. Managers of MFIs set yearly, monthly, and weekly targets to achieve for credit agents. Credit agents are required to achieve these financial targets by hook or by crook, leading them to use unethical and immoral practices to persuade poor people into bad loans and getting repayments by any means required. This leads the MFIs and credit agents to ignore their social performance in the ways in which they relate to the clients.
A number of instances have been reported showing credit officers persuading or even coercing poor people to take bad loans. This is no good news for the client. Unable to pay the weekly repayments, the client has to face humiliation in front of society. The credit officers do not leave the houses of the client till they pay back the loan “by any means”. This has led to many poor people losing assets they already owned or issuing even bigger loans to repay the current loan. In many cases, even credit officers lend personal money to clients at high interest rates so they can repay the installment on time. Such favor is recalled by the officer while persuading the client for an even bigger loan next time. This shows that high repayment rates and huge turnovers in the MFIs should not be blindly considered as the “success” of the microfinance sector. Even the celebrated fact of most clients receiving microfinance services being women also seems to be a shocking harsh reality. It is reported that their husbands actually force many women to get money from these micro-financial services, which they later spend on betting and alcohol.
"These credit agents sound awful. They’re torturing poor people and forcing them into bad loans."
Actually, there is more to this story. The credit agents have strict financial targets, and if they miss these targets, they face a lot of humiliation and costs. The environment in which they are working is exploitative. The managers do not have a good reputation among the staff as well as the clients. As mentioned by one of the clients, once a pregnant woman credit officer was forced to stay overnight at the client’s place to get the repayment, and during the same night, her water broke. She was taken care of by the client, whose house she was staying at. Many credit agents have expressed their grief and shame regarding how they treat their clients.
"Okay microfinance seems to have way too many issues. If it has so many problems, why don’t we just put an end to it?"
"Okay, Uzair, from what you’re saying, microfinance is not as black and white as the media portrays it to be. As an idea, it has the potential to help the poor and provide them access to financial services but in order for it to achieve that certain improvements need to be made so that these loans reach and benefit those that need it most. These loans should also be well-suited to the structural and cultural systems of India. Clients and agents need to be treated better and we need to find an approach that is both financially viable and reaches the poorest of the poor. It’s a lot to be done but I think it’s going to be worth the effort."
Very well written, an interesting read.
ReplyDeleteThis is a work well done! Love how you’ve made the entire blog into an informative conversation! However, I think more data would strengthen the information provided about the topic. Great blog!
ReplyDeleteA very informative and well-structured blog. Especially appreciate the conversation-style of writing used, which helped the readers grasp the concept easier. In the blog, you have spoken about the fact that the microfinance sector has not lived up to its original intent of alleviating poverty and have made it quite clear that a lot of work needs to be done to fill these gaps. But could you also briefly cover the future of microfinance? Especially considering the present Covid situation, as small entrepreneurs and migrant workers were most affected.
ReplyDeleteThank you Akhila. Not putting things in strict boxes of whether microfinance alleviated poverty or not, we do acknowledge that micro finance sector has a long way to go and needs improvements to fulfil its said purpose of expanding financial services to the poor.
DeleteAs far as COVID 19 is concerned, it has stressed the micro finance sector just as hard as other sectors (if not more severely). In-fact to relieve the sector from this financial stress, the RBI did come with Targeted Long Term Repo Operations (TLTRO). Last year, under TLTRO 2.0, RBI announced Rs. 50,000 crore for microfinance institutions (MFIs) and non-banking financial companies (NBFCs) to get enough liquidity.
These policy measures show that micro finance is not one we have given up on, due to its immense potential. Despite the grey areas, and negative externalities, the sector is and will be remaining to continue helping the poor.
I hope I answered your question. For more about the TLTRO 2.0 and what it means for MFIs, you can ask me and I will share an article with you :)
Thankyou
Yes! This definitely answered my question. Thank you for these insights Uzair. Please do share the article on TLTRO 2.0, as I would love to read further.
DeleteThank you :)
A very well written and structured blog. You have provided a holistic picture of micro-finance as a service. In the blog you have mentioned, micro-finance is not as black and white as the media portrays it to be, then why is it that western media praises micro-finance despite it's not so magical ground realities.
ReplyDeleteThank you Ameya. This is an interesting question, and I too was curious to know the reasons for same. In North America, Europe and Japan the media routinely presents microfinance as a great success. Indeed, journalists treat the provision of small loans to poor people as virtually synonymous with poverty reduction. A classic example in the New York Times of 12 April 2004 reported that "one of the US's most successful venture capitalists" was so impressed with microfinance that he was going to put his time and expertise into supporting the microfinance industry. The anecdote of Sivamma, a woman who used a $45 loan to create assets worth $5,000 in four years, was presented as evidence of what microfinance could achieve.
DeleteThe NYT and other broadsheets spread a simple message: microfinance is a "proven development strategy, expected to benefit 100 million of the world's poorest families". The sector has regularly been presented as a remarkable opportunity for leading us entrepreneurs to play a role in as "...even philanthropy aimed at alleviating poverty can be profitable" (Forbes 2007). This narrative in the western media continues despite the 2009-10 crisis in Indian microfinance (Hulme and Arun 2011), microcredit "bubbles" in Nicaragua, Bosnia-Herzegovina and Morocco.
As Taylor (2012) points out, with the recent concept of "financial inclusion", promoting microfinance has been presented as a "global moral imperative". In December 2012 the Guardian devoted a full page to "the magic of microfinance", lauding what microfinance was achieving and building the case for its expansion through commercialization.
You can read more about this in "Has Microfinance Lost Its Moral Compass?" by David Hulme and Mathilde Maitrot on EPW.
Thank you.
This is a well written blog and it clearly lays out the way in which microfinance works. The way in which the blog has been written is interesting and informative. I would like to know how this market can be brought into mainstream attention amongst the rural folk as there would be certain grey areas in the market.
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