FINANCIAL services are like clean water and electricity — they are essential to leading a better life. Poor people need services like insurance, savings, remittances more than anyone, because in developing countries, poverty does not just mean low income, it means volatile income. The poor need to set aside money in times of plenty and draw it out in lean times. Financial services allow you to insure for health care, save for children’s education, and borrow for wedding or funeral costs.
Microfinance is facing trouble because the purity of its mission has been diluted. When it started, microfinance was a financial tool being used for social good. Now it has increasingly become a social tool used as a way to generate money which is why it has lost a lot of its original sheen. This is one reason why microfinance often runs into heavy weather and hits periodic roadblocks and default crisis. A number of rigorous field studies have shown that even when lending programmes successfully reach borrowers, there is only a limited increase in entrepreneurial activity and no measurable decrease in poverty rates.
Microfinanciers believe that direct evidence is not needed. Microfinance institutions insist as long as they can demonstrate high ‘repayment rates, it can be assumed that lives of the poor are improving. The logic goes that if a person is able to repay their loan with interest, they must have used it productively. There are few recent studies that show mixed effects of micro-finance. The most encouraging effects are for programmes that don’t fit the traditional ‘lend to expand a business’ story.
One concern is that as microfinance becomes more commercialised and increasingly concerned with large-scale impact, profits take precedence over social mission. Anything not strictly financial is cut in the name of ‘efficiency.’ Profit-minded shareholders see training for entrepreneurs; financial literacy and counselling, skill training, or even the extra five minutes of a caring loan officer spent with a client is seen as a cost rather than an investment.
Since most microfinance clients have little or no security or collateral to pledge, microfinance providers instead turn to what is called in microfinance parlance as ‘social collateral’ which is built through groups of borrowers who guarantee each other’s loans. The group concept has two variants: firstly, the international Grameen model; and secondly, the indigenous Indian model.
The Indian version of microfinance is far more empowering. It is not just lending money. Borrowers in a 20-member groups called self help groups cross-guarantee each other’s loans. They receive skills and business training, peer mentoring, technical support, on-site follow up and basic inputs in preparing a business plan which provides a basic roadmap for the borrower to reach her economic goals. Group activities allow the women to understand and practice various techniques for running the business collectively. This prepares them for individual entrepreneurship. In a way, it is a basic entrepreneurial school.
The international MFI model is a different ballgame altogether. Here the sponsor is a profit-oriented venture capitalist, who sees the rural credit market as a powerful business opportunity. The MFI apparently brings great professionalism, innovation and technology to its enterprise of venturing to provide loans that banks do not. Yet MFIs form no groups engaged in governance functions. The group’s joint liability groups they promote are merely credit groups. Even when they operate through non profits, MFIs are primarily concerned with lending and recovering what they lend at an interest rate far higher than what banks charge to cohorts of people. Basically the international model is rooted in the philosophy of Pralhad which argues that there is enormous wealth at the bottom of the pyramid.
While self help groups meet regularly and require members to participate in group financial decisions and some basic financial training, JLG’s are simply a prerequisite for accessing loans. In fact, joint liability groups may in some cases serve to hide situations in which women have lost control of the loan because field staff will interact only with the group leader during collection times and never actually visit the homes of the other borrowers. In the Grameen Bank model, much more is required of women in the way of group meetings and support, but this model is purposefully avoided by Indian MFIs.
These small-denomination loans are often used for a variety of purposes, could be for small business or for coping with unpredictable incomes by making funds available to meet their basic needs and manage shocks, such as death or illness. Done right, these loans have shown promise in allowing some borrowers to build sustainable livelihoods.
‘We must think beyond the standard microcredit model. Modern microfinance — savings and insurance, and more flexible credit products — often has generated larger impacts than simple credit,’ says Dean Karlan the well known microfinance researcher, and founder of Innovations for Poverty Action. ‘Financial services can make important differences in people’s lives, but we need more innovation and evidence to determine what is best to do, and, meanwhile, we should set our expectations appropriately.’
To ensure a more smoother and dependable client base microfinance has to reorganise its agenda and properly realign its focus so that both social mission and business goals are properly balanced. Similarly people should be made aware of modest gains that microfinance can deliver. The fairy tale narrative has done harm both to the industry and society and left the investors dismayed.
Poor people need, like everyone else, to have access to safe, sound, reliable and respectful systems in order to fulfil their financial needs. Microcredit still has a place yet in development economics. Paired with other development tools such as cash transfers, micro lending can offer a sustainable investment option for small entrepreneurs, leading to a renewal in its mission to fight poverty.
Moin Qazi is the author of Village Diary of a Heretic Banker. He has spent more than three decades in the development sector.
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