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Microfinance continues to thrive despite being under fire from legions of critics. One plausible reason for the lingering faith in the power of microfinance is that it provides a convenient strategy for investors to demonstrate that they are active fighters against poverty and are trying to save the poor while making a substantial amount of money from them. It is built on a false belief that credit is the most vital need of the marginalised. One of those who has thoroughly studied the phenomenon, Thomas Dichter, says the idea that microfinance allows its recipients to graduate from poverty to entrepreneurship is inflated.

He sketches out the dynamics of microcredit: “It emerges that the clients with the most experience started using their own resources, and though they have not progressed very far—they cannot because the market is just too limited, they have enough turnover to keep buying and selling, and probably would have it with or without the microcredit. For them, the loans are often diverted to consumption since they can use the relatively large lump sum of the loan, a luxury they do not come by in their daily turnover.” He concludes that,“Definitely, microfinance has not done what the majority of microfinance enthusiasts claim it can do—function as capital aimed at increasing the returns to a business activity.”

Microfinance has come under increasing scrutiny in recent months. Stories of astronomical interest rates driving the poor deeper into poverty, compounded by tales of malicious moneylenders intimidating borrowers to the point of suicide, have recently come to light in the international press, exposing fundamental flaws in the design of institutional for-profit microfinance.

Not only are borrowers often innumerate, illiterate and unfamiliar with interest rate calculations, but they frequently have little or no awareness of local demand for goods and services. Consequently, they often fail to establish successful income-generating ventures and therefore cannot repay their loans.

Microfinance, including microcredit, is often considered to be an instrument that promotes empowerment. While it can stabilise livelihoods, broaden choices, provide start-up funds for productive investment, help poor people to smooth consumption flows and send children to school, it can also lead to indebtedness and increased exclusion unless programmes are well designed.

Debt can both unlock you and lock you. Debt is one thing that has both the greatest promise and, perhaps, also the gravest peril. Debt or credit, the cash that we borrow from lending institutions, exists for a reason .Before you apply for it, you should ask yourself if you have a valid reason for it or you are taking it just because people are lining up the way pollsters queue up for freebies. The second question you should ask yourself is whether it is part of your   financial plan .If it is ,are you sure you are going to get a return higher than what you will be paying for it .This financial return should also cover your own effort that will go into generating that return.

According to Naila Kabeer, Professor of Gender and Development at the London School of Economics, women who have some prior experience of entrepreneurship and are not engaged in it for purely subsistence reasons are likely to benefit greatly from microfinance activities, given the barriers they face in accessing formal financial institutions. But for poorer women who are struggling to get their enterprises on a viable basis, financial services on their own are unlikely to be enough and may even end up plunging them into debt. These women would need financial services as part of a larger package of supportive measures which address their human capital deficits, their unpaid domestic responsibilities and perhaps also lack of self-confidence and fear of taking risks

In the world of microfinance, women borrowers are viewed as autonomous individuals who make independent choices in the marketplace. But this is not the reality. Rural women live in extended family structures. These women’s identities are relational, shaped by factors such as marital kinship, ethnic, and tribal allegiances.They negotiate complex kinship and social obligations.

It’s not surprising to learn, therefore, that in most cases men control the loans that women receive. The men may simply use the money for their own purposes; in addition to male control, other problems affect a woman’s ability to repay a loan. In case of a default, they suffer humiliation and public shame which heightens tension both at home and in the community. Such humiliation of women in a public place gives males in the household and in the lineage a bad reputation. In extreme cases, peers may take the defaulter to the police station. For a man, if he is locked inside the police stations for several days, it would mean almost nothing to other people in the village. But if this happens to a woman, it will bring shame to her household, lineage and village.

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The biggest problem is that people who get these small loans usually start or expand a very simple business. The most common business for microfinance is simple retail—selling groceries, where there are often too many people, fierce competition, and where they don’t really earn enough money to get out of poverty.

We need to create more jobs, and microfinance does not help to do that yet. The debt trap is an under-reported problem. Quite a few people invest money, their business does not make money and goes under, and they are stuck with the debt. The interest rate on this debt, even with a microfinance loan, is quite high, so some are never able to repay it. Another reason why they get into a debt trap is that, in theory, you should take a microloan to invest in the business. But in practice, a lot of people use microloans for a wedding, festival, or to buy something. A lot of these people don’t know how to use debt.

There has been a lot of rethinking in the microfinance fraternity. One of their major premises that have been proved flawed is that credit is   the only important financial need that people have. This seems clear and obvious now, and microfinance organizations are now expanding the range of microfinance offerings. While we must still consider the risks and ethical dilemmas as we  continue to aggressively  push   microcredit , the power of entire range of microfinance services  to help us achieve a more equitable world is becoming increasingly clear.

Several MFIs endorse smart microfinance being espoused by the Smart Campaign but it is important that it is practiced on the ground .What is smart microfinance?    Microfinance industry leaders from around the world came together in 2008 to launch a campaign to establish the Client Protection Principles. These principles are: appropriate product design and delivery, prevention of excessive indebtedness, transparency, responsible pricing, fair and

The principles of smart microfinance are globally recognized as the basis of safe microfinance. They build strong, lasting relationships with clients, increase client retention, and reduce financial risk. When they deliver transparent, respectful, and prudent financial services, financial institutions ensure that their clients use financial services well and build a foundation for healthy operation for years to come

The practical question is not whether microfinance should continue, but how it can play to its   strengths without damaging its social conscience. Before pundits and politicians reduce the questions and solutions posed by the occasional crisis down to sound bites and slogans, we must realise just how positive the effects of microfinance can be, for both financial inclusion and livelihood promotion, if handled correctly.

It may appear that the naysayers are ready to sound the bugle and shout out “the king is dead, long live the king”, but microfinance can redefine itself as a leaner, more modest business with a social conscience and a mission-oriented goal, and continue to be profitable. Although, only time will tell.

Moin Qazi is the author of the bestselling book, Village Diary of a Heretic Banker .He has worked in the development finance sector for almost four decades .He can be reached at moinqazi123@gmail.com

 

2 Comments

  1. “only time will tell.”

    “In 1976, the village of Jobra and other villages surrounding the University of Chittagong became the first places where Grameen Bank loaned money to people” Wiki entry

    Isn’t over 40 years time enough?

    • Tarun Kumar Debnath says:

      What is the socio-economic status of that village and role of microfinance in those changed, if any? Can anyone throw some lights?