NextBillion.net - Development Through Enterprise - Will Bureaucrats Ruin Microfinance? - Comments

Microcredits in India

Barbara Toepfer — Wed, 02 Jul 2008 14:14:48 -0400

A colleague of mine and I are at present working on a teaching unit on the topics "microcredits / Grameen Bank / making business in India". It is aimed at advanced secondary students (English language lessons)and will be published in a German magazine early next year. We wonder if this page or any other we would like to learn about could be used by these students to exchange their ideas and findings with other people in the world - preferably but not necessarily people in India itself. Can anyone help, please?

Re: Microfinance & Regulation in India

Dweep Chanana — Fri, 11 Aug 2006 10:27:16 -0400

Rob - on the specific question of Spandana, you may find the following interesting: article on The Hindu and a CGAP focus note. I will let you draw your conclusions, though I believe the NYTimes article does not inspire me to conclude that competition was the driving motivation - though politics may well be. Further, I hope this case cannot be extended to create a general doom-and-gloom scenario for the MF industry - something the article also does.

On the second point, my post (and words) intended to be critical of the belief that microcredit equals poverty alleviation - something that has become a bit of a holy grail. Such a belief prevents us from critically questioning that very premise, while leading us to forget - and ignore - other issues that need to be treated.

However, you have correctly pointed out a weakness in my argument, that waiting for a perfect world may be at least as bad. It is one I have begun to struggle with lately in the context of development aid (see my last post). Thank you for a further reminder that I may be too critical.

Re: Microfinance & Regulation in India

Rob Katz — Thu, 10 Aug 2006 14:13:09 -0400

Dweep - you make some excellent comments and criticisms, which I will attempt to address here.

First, I agree that the New York Times article is not impartial enough and there are no hard data used to reach the conclusions he reaches. Still, it is the first time I have heard of a government shutting down a profitable enterprise serving a key constituency (the poor) because it has a competing product. That's terrible governance, in my opinion, and can only lead to bad consequences.

Second, I agree that we should be slow to credit microfinance as the savior of all developing countries. It isn't - and Dichter makes some good points to that effect. I also took the time to read your post, and while I agree with some of your general observations, I found the following paragraph problematic:

Credit is not an end in itself, but a means to generating economic opportunity and growth. Yet, in all the hype we have forgotten to question the basic premise. Is lack of credit really the problem? Or only one of many problems? If the latter, it must be delivered only after other barriers have been removed. And the hype prevents that from happening.

I agree that lack of credit is one of many problems, but to say that we should address it only "after other barriers have been removed" is defeatist and overly negative. Does that logic hold true for other development paradoxes? Would you say that we should not support programs to distribute anti-mosquito bed nets because the local officials may skim a bit off the top, or that the roads are poor, or that the customs agents are corrupt?

If we hold back microfinance and wait until all the other development issues surrounding it (primarily governance, regulation, and corruption) are resolved, we won't make any progress. My chief complaint here is that the Indian government is to blame. If microfinance institutions are running profitable businesses that serve the poor, why should they be closed up? Are they hurting the poor? There are not enough data to say either way...but the anecdotal evidence is overwhelming, isn't it?

Microfinance & Regulation in India

Dweep Chanana — Thu, 10 Aug 2006 13:19:40 -0400

Like you, I am surprised that the Indian government may be moving to regulate microfinance. However, I cannot bring myself to express the outright criticism you do.

First, I do not think the NYTimes article can be taken as the rule. Rather, it is extremely disappointing and inspires little faith with its superficial reporting. It makes no mention on how many lenders were closed or why, seems based on a single visit by one person, and cannot be described as impartial.

Beyond the tone of the article, I think there is reason to stand back and question microfinance as the unrivalled success story it is claimed to be. I point you to a critique of microfinance, that I previously commented on.

I would not deny Microfinance's ability to help people, and would be happy if you can refer to studies/articles that test the long-term success of microfinance in increasing people's incomes. However, that, "the women keep returning, three, four times in a row" cannot be taken, a priori, as a sign of success.

Will Bureaucrats Ruin Microfinance?

Rob Katz — Thu, 10 Aug 2006 09:03:55 -0400

A column in today’s New York Times suggests Indian microfinance institutions might soon be subject to regulations, such as interest rate caps, that would force them to dramatically reduce or even halt operations. Why must governments see the private sector only as a threat, and never as a partner?

Read past the break for excerpts from the article and my analysis.