BizWeek Takes a Shot at Explaining Microfinance

Submitted by Derek Newberry on September 25, 2006 - 11:29.
Published in:
bizweek logoIt was bound to happen- BusinessWeek caught the microfinance bug today, publishing an extended overview of this booming industry in India.  Rather than simply explaining the microfinance movement and describing how it works, the author gets into some of the structural imbalances spurring market demand for credit in small amounts.

The article contrasts India’s prosperity on a national level “its economy has clocked 8%-plus growth over the past three years” with the unequal distribution of these gains “roughly 30% of India’s 1-billion-plus population lives below the poverty line” to illustrate the reason why representatives of ICICI bank would be traipsing around rural India handing out $100 at a time.

I did hope to see a little more honest criticism of microcredit’s darkside.  Although the spate of suicides related to lender usury is addressed, this is condensed into a brief section that ignores some of the complexities of the debt debate.  In particular, I’ve heard that in Bangladesh, MFIs like the Grameen Bank found that some of their clients were paying back money borrowed from other MFIs.  It bears mentioning how widespread this practice is and what can be done about it.

Otherwise, it is clear that microfinance initiatives are maturing from providing simple lending schemes to offering services such as savings accounts and insurance to segments of the BOP market.  As organizations and governments become further involved with these services, we need to engage in broader assessments of the successes and failures of microfinance.


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...the darkside
Submitted by _lance durham on September 25, 2006 - 12:51.
and what is the 'darkside' of loans from local moneylenders?
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more on the darkside
Submitted by Derek Newberry on September 25, 2006 - 15:37.
Hi Lance,

Thanks for your comment- as far as the darkside I allude to, I'm refering to two trends I've heard of. The first is that a number of lenders take advantage of their clients by charging extraordinarily high rates or by introducing hidden costs that cause borrowers to incur huge debts. The Bizweek article touches on this issue, along with the increasing number of suicides that have happened in rural India as a result of these insurmountable debts.

The second trend is one that was relayed to me by Shae Emran, an economist who has previously worked with Stiglitz. Emran mentioned that in his home country of Bangladesh, the microfinance market has proven so successful, there are increasing numbers of lenders willing to offer credit. One result of this is that a number of borrowers will accept money from one MFI and repay the loan by borrowing from another. They will then repay that loan with a loan from another bank and so on. I have no idea how widespread this issue is, just that it is a significant consideration. Are you aware of any other questions surrounding the benefits of microfinance?

-Derek
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hmm
Submitted by _lance durham on September 25, 2006 - 18:41.

well, nobody will say that usury or suicides are positive things. they're not. but...

1) usurious lending practices by a 'MFI' are to be expected. anything profitable will attract those who would take advantage of others. a smart usurious moneylender would do well to upgrade himself to 'MFI' status. i would say that the answer to this problem is not less MFI activity, but rather it is more MFI activity - more competition in those areas will drive down the rates in those areas.

2) these suicide numbers....are they confirmed to be because of usurious lending rates? how do they compare to suicides under the moneylender system? also, i'd like to see how other indicators had improved or lagged - human trafficking, water access, food consumption, personal wealth, etc.

 

'borrowing from peter to pay paul' isn't a positive thing either. but...

1) i'm happy for an indication that there are more lenders around (it drives rates down)

2) we might not consider this to be all negative behaviour. what were their options before when they couldn't pay their moneylender? selling your land or child?

3) also, i'm particularly happy because this actually indicates the need to begin rolling out some human identification, property registration and credit rating businesses. although this behavior is negative, i suspect it will probably lead to greater economic growth in the long term.


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more
Submitted by Derek Newberry on September 26, 2006 - 11:34.
All good points. I would agree that the indication is not less MFI activity or withdrawl of support to rural areas but more engagment. More competition, more consumer protection, more integration. I hope I didn't convey with that posting that I thought microfinance should be done away with, but just because it is good that it exists doesn't mean there is no room for improvement. In fact, regulations like the ones India are considering now may be the best thing to happen in this movement.
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Credit Ratings
Submitted by Sarah Bauerle on October 1, 2006 - 11:14.
In response to Lance Durham's observation: "3) also, i'm particularly happy because this actually indicates the need to begin rolling out some human identification, property registration and credit rating businesses. although this behavior is negative, i suspect it will probably lead to greater economic growth in the long term." While it is true that a movement towards a credit rating system will certainly reduced transaction costs for microfinance providers and perhaps pave the way for larger extension of credit, it is important to note that credit rating systems tend to deny the poorest access to credit. There are two main thrusts of microfinance - 1 is to bring relatively middle income people in developing countries into a codified financing system and the other is to provide those who are truely poor - in both a relative and absolute sense - access to credit and other financial services. It would be a shame if the growing interest in purely commercial microfinance ventures acted to shut the door once again to the poorest people. I am definitely a proponent of commercializing and institutionalizing the growing movement to provide financial services to people in developing, underserved areas. However, in many ways, microfinance is a bridge to bring those from the fray into the traditional banking system and it is important from a development perspective that commercialization efforts do not take away from the roots of microfinance - servicing those individuals who are excluded from "the system." Therefore, regardless of the extent of commerical microfinance, there will always be a need for a less institutionalized form.
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Submitted by _lance durham on October 1, 2006 - 15:30.
i dream of the day when there will be no need for microfinance-as-charity, no need for microfinance-as-bridge... a day when there will be no individuals excluded from the system... a day when companies have found how to profit and prosper through their innovations to serve the poorest of the poor.
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