The announcement of 2005 as year of micro-credit by UN and subsequently awarding noble peace prize, 2006, to Professor Muhammad Yusuf, founder of Gramin bank has made Microfinance a revolution. Editorials of leading newspapers and magazines are flooded with it; several books and research papers have been published elucidating how microfinance will empower poor. Microcredit refers to the non-collateralized small loans to lowest-income people who are otherwise ineligible for traditional bank loans. The model seems quite simple and sustainable, provide credit to the poor and it will ensure their development. And in this process of development creditor can expect an annual return of 20-25%. But if we think over it some fundamental questions will arise. Is the credit a solution for poverty, a symbol of empowerment? Can it ensure the development of local economies and subsequently those associated with it. Is it not that this whole concept works on the optimistic assumption of entrepreneurial abilities in uneducated, socially and economically weaker masses? Recent critical studies on Microfinance have come up with some issues.
Firstly, Shift of borrowers from primary producer to market consumer. Most of the beneficiaries from south Asia are small farmers and studies show that soft loans have lead to increase in cyclical consumption with no or limited investment in agricultural inputs.
The intense marketing by FMCG companies in association with MFIs and SHGs easily make the money disappear in the channel itself. And what is left are debt traps!! You won’t be surprised to see Johnson and Johnson (J&J) as a major sponsor of Micro-credit summits. In India at many places project Shakti of HLL is carried out by SHGs who also distribute credits. With rural India as the next big target of consumerism wave by FMCGs, MFIs have provided an easy channel.
Even if the model is correct, does it reach to poorest of the poor? Bonded labors constitute a major part of this category. A recent study by International Labor Organization summarizes four reasons of bondage viz. Social exclusion, Asymmetry of information about legal rights, Debt, Monopoly in labor market. Large number of MFIs has an inefficient credit delivery mechanism. SHGs constitute better off (socially or economically) people from villages and they seldom provide loans to poorest of poor where the repayment risk is considered high. In fact some NGOs in Africa have further traded freedom of these labors by giving soft loans. And it may surprise that many of these loan giving firms do not provide facility of savings account.
Thirdly, high interest rates also play a major role. Normally loans are given at a rate of 10-12% to SHGs who further distribute making the effective rates to go as high as 25-30%. Several theories propounding the absence of ceiling in interest rates have come up with open support from big lending corporations.
Finally, big corporations lending money to MFIs are pushing their products (low quality fertilizers, seeds etc.) as was the case with Monsanto Corporation, global life sciences company, in Bangladesh.
"....high capital requirements, regulatory limits on raising debt from foreign sources and foreign equity limitations constrains MFIs", this is from the recent report of World Bank where it condemns the Indian regulatory framework for the slow growth of MFIs in India and propose to replicate the models of Bangladesh and Indonesia. Well a 20% return isn’t bad after all....
Written By: Sourabh Tripathi, IIM Indore
Firstly, Shift of borrowers from primary producer to market consumer. Most of the beneficiaries from south Asia are small farmers and studies show that soft loans have lead to increase in cyclical consumption with no or limited investment in agricultural inputs.
The intense marketing by FMCG companies in association with MFIs and SHGs easily make the money disappear in the channel itself. And what is left are debt traps!! You won’t be surprised to see Johnson and Johnson (J&J) as a major sponsor of Micro-credit summits. In India at many places project Shakti of HLL is carried out by SHGs who also distribute credits. With rural India as the next big target of consumerism wave by FMCGs, MFIs have provided an easy channel.
Even if the model is correct, does it reach to poorest of the poor? Bonded labors constitute a major part of this category. A recent study by International Labor Organization summarizes four reasons of bondage viz. Social exclusion, Asymmetry of information about legal rights, Debt, Monopoly in labor market. Large number of MFIs has an inefficient credit delivery mechanism. SHGs constitute better off (socially or economically) people from villages and they seldom provide loans to poorest of poor where the repayment risk is considered high. In fact some NGOs in Africa have further traded freedom of these labors by giving soft loans. And it may surprise that many of these loan giving firms do not provide facility of savings account.
Thirdly, high interest rates also play a major role. Normally loans are given at a rate of 10-12% to SHGs who further distribute making the effective rates to go as high as 25-30%. Several theories propounding the absence of ceiling in interest rates have come up with open support from big lending corporations.
Finally, big corporations lending money to MFIs are pushing their products (low quality fertilizers, seeds etc.) as was the case with Monsanto Corporation, global life sciences company, in Bangladesh.
"....high capital requirements, regulatory limits on raising debt from foreign sources and foreign equity limitations constrains MFIs", this is from the recent report of World Bank where it condemns the Indian regulatory framework for the slow growth of MFIs in India and propose to replicate the models of Bangladesh and Indonesia. Well a 20% return isn’t bad after all....
Written By: Sourabh Tripathi, IIM Indore
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