Macro problems with microfinance

The whole concept of lending money has just got a makeover and re-branding through the new set of institutions called microfinance institutions (MFIs). These are welcomed overwhelmingly by a few people who make money out of this too. It is seen as a darling of development, a step that could control inflation, alleviate poverty and open domestic markets to imports and multi-national corporations.

Micro finance institutions have replaced the traditional money lenders. The poor, often tagged as beneficiaries, were exploited by money lenders previously and now, by a set of educated class of people who run these MFIs. Exploitation of the poor has just gotten easier and more organized in this way.

In the recent years, though money lending through MFIs has become a major financial activity in the villages, barbaric and inhuman methods such as harassing borrowers, intimidating, abusing, mentally and physically harassing them have been incorporated into the whole process of money lending. The borrowers are always under the pressure to repay the loan (on a weekly basis) at a heavy compound interest for petty loans they take.

Another argument is that MFIs lend money at exorbitant interest rates which range from 20 percent to 40 percent. This ugly face of MFIs gives us a vivid picture of the dark underbelly which is now making its way into the media.

In the name of empowering the poor, this form of organized exploitation has given many reasons for businessmen to make money at the cost of the poor, who are often seen as “fortune at the bottom of the pyramid.” Previously, money lenders lent money at higher rates of interest because it was the individual who was lending money, but now, it is an institution comprising of a group of individuals who are lending money and in turn, pocketing extra money from the poor in the name of interest rate.

For example: In Andhra Pradesh, Reserve Bank of India (RBI) wanted to de-recognize many MFIs that were indulged in compelling women from Khammam, Warangal, Mahbubnagar and several coastal Andhra districts to enroll themselves to be beneficiaries at MFIs.  Caught in a debt trap, many borrowers committed suicide. In the name of loan recovery, human rights were grossly violated.

When the policy makers say that MFIs are a medium of financial inclusion of the poor, one must read this example published in the Economic Times to know whether MFIs are including or isolating the poor from the society.

“A woman who takes Rs 10,000 loan from a microfinance institution has to pay Rs 225 every week. If she is unable to make this payment or has another emergency in the house, she will take a loan. The existing lender will not give you a fresh loan till the old one is at least 35 weeks old, so she will borrow from another MFI.

That's another Rs 225 every week. Weighed down, she will take a third loan in a matter of months. Now she has to pay Rs 675 every week! And so, a fourth loan. Such women are forever wondering where their next installment will come from. Some are working as far labour to repay loans. If they are unable to fully repay, they sell cattle, land or jewellery."

While we analyze how MFIs are more or less like slow poison to these “beneficiaries”, what one has to look at is that the RBI allows MFIs to reach those places where banks cannot make their way. But, under certain norms, which are often changeable or overlooked at the cost of poor people’s lives, MFIs have set up shops.

But, there have been models of lending money through MFIs in Indonesia and Pakistan, which have been successful. In Indonesia, 13 banks under the Central Bank, 12 NGOs have lent money to 420 self-help groups (SHGs) in which internal lending among the beneficiaries was allowed and no credit would be granted to an SHG without savings by the individual members of SHG. This helped every member save money to repay the loan as well as to save it for them.

In Pakistan, an organization called “Akhuwat” provided loans to beneficiaries at zero percent interest, except that the time period for repaying the amount was fixed. This led to the creation of pool of money for the poor and has attracted more than 50,000 honest people to be a part of this.

Now, if we compare MFIs with rural banks (public sector banks), rural banks give loans to members of SHGs at 14 percent interest rate and can increase the loan repayment period, considering the economic status of the beneficiary. Also, rural banks provide the beneficiaries with extra loans to clear other debts (if any). But, the SHG members have to save money every month in order to deposit it in the bank as their savings. These banks also allow internal lending of money which enables each member to save money, apart from generating income.

So, if financial inclusion of the poor is the main agenda, then increasing the flow of funds to the informal sector would be an advantage because the profits will reach the low income group borrowers.  Access to the flow of funds in the formal sector would facilitate competition within informal sector and increase the efficiency.

Secondly, participatory budgeting model followed in Venezuela exemplifies how people participate in a community’s activities and plan the budget according to the requirements of the members in the community who are represented by elected leaders. Money lending is a part of this structured process in which a member of the community is appointed to check the flow of capital. This brings in transparency and gives power to the people to make decisions based on their needs and necessities and also to generate income.

An institution that would combine the strengths of an NGO and that of a financial institution would be beneficial to a community. But, the reliability factor on such institutions is always questionable because there is a risk of these institutions becoming like the regular MFIs which petrify the beneficiaries to repay loans. So, this model should enable members of a community to have access and control over the financial resources.

Finally, it all boils down to a question which tests the credibility of these suggested solutions. Corruption, lack of proper implementation and misuse of funds have dogged everything in our society till date, so why wouldn’t these suggestions be victims of such cruelty? Transparency is the only way out.

If we think that only the traditional money lenders are guilty of such heinous crime, so are the micro finance institutions.