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Thumbs down to microfinance!
By Sudhirendar Sharma



Despite generous support from policy makers, donor and private investors in recent years, the future of micro-finance continues to remain grim.


Why microfinance has failed to reduce poverty? (source: Asia Left Observer)

For past eight years, in late November or early December, micro-finance institutions huddle together to assess performance and to devise future strategies in an environment that has lately not been conducive to their growth. Called ‘Micro-finance India Summit', the event focuses on trust-building by a sector that has earned widespread mistrust of the clients, donors and governments alike. Bridging the hiatus of the recent past, micro-finance institutions aim at re-building a sagging sector.

Ever since a series of scandals hit the sector – including suicides among indebted borrowers in Andhra Pradesh – simple stories of how small loans can help people pull themselves out of poverty have been overshadowed. Consequent shrinking of customer base has made the golden child of development policy fall on bad times. Poor loan recovery, on the other hand, has led to liquidity crunch, forcing small micro-finance institutions to close operations whereas the relatively endowed have continued to struggle for survival.

Despite generous support from policy makers, donor and private investors in recent years, the future of micro-finance continues to remain grim, Much is of its own making as the hyped claims of reducing poverty have been found to be hollow. In the garb of fighting poverty, usurious interest rates were used to exploit the poor while profit was pocketed to scale the operations. Nothing has seemingly worked as the micro-finance institutions find themselves in a crisis of social and financial legitimacy.

Bad news for micro-finance hasn't stopped pouring since a systematic review, published in August 2011 by the Institute of Education at the University of London, had concluded that the 'enthusiasm for micro credit is built on foundations of sand'. A more recent study, commissioned by the UK Department for International Development (DfID), has advised against lending to the poorest of the poor, who are more vulnerable to the dangers of debt.

That an international donor like DfiD has cast doubts on the legitimacy of micro-credit raises serious question on why has micro-finance been allowed to persist till date and what vested interests its proliferation may have served? Reports indicate that the Government of Norway, a long-time funder of the Grameen Bank, will stop funding micro-finance henceforth as several other donors seek critical appraisal on purported goals of small loans.

The noose is tightening on micro-finance institutions to realign their business model towards responsible lending even though there is a clear dilemma of profit versus social objective.

Amidst such controversial existence, does micro-finance still hold out hope? Is there a future for financial services for the poor? Is there a future for micro-finance institutions if the sector is reinvented? While there is no denying the fact that the poor need financial services like clean water and electricity, it will be erroneous to believe that micro-credit will 'lift' people out of poverty. However, carefully designed financial services can deliver better ways to the poor to manage their money.

Ironically, the current debate around micro-finance is less about the poor and more about the funding worries of the micro-finance institutions. But for the Reserve Bank of India which, in the light of the Micro-finance Institutions (Development and Regulation) Bill, 2012, has issued recommendations focusing on client protection, the upcoming bill is being analysed from the perspective of whether or not it will fuel life into the micro-finance sector.

While the micro-finance sector remains torn between extremes of excitement and despair, it is the for-profit sector that might capitalize on the prevailing situation. A recent study by the Deutsche Bank describes micro-finance as 'a development program turning commercial'. With private banks and financial institutions taking the lead, the non-profit organisations may lose their role as the primary vehicle for micro-lending. No wonder, private banks have remained cautious in lending to the micro-finance institutions.

Alternate to micro-finance rests on local area development. Giving people money because they have no money has been an outdated perception of poverty.

Notwithstanding for-private sector entry into micro-lending, crucial question is whether micro-finance institutions will survive proposed 26 per cent cap on interest rate with just 12 per cent margin? Analysts contend that in such a situation bigger lenders with lower operational costs will have an edge over small and medium micro-finance institutions. The noose is tightening on micro-finance institutions to realign their business model towards responsible lending even though there is a clear dilemma of profit versus social objective.

Much has been debated about how micro-lenders can survive under changing conditions; however, there has been less analysis of what might replace it and how funds could be better used to help poor communities move out of poverty. Given the fact that this private-sector market-driven model of poverty reduction, justifying neo-liberal inclination, has failed to live up to its promise of bottom-up development a crucial re-thinking on alternatives to micro-finance must begin.

Alternate to micro-finance rests on local area development. Giving people money because they have no money has been an outdated perception of poverty. People need favorable conditions to make the most of available opportunities. No wonder, micro-finance only helped divert resources away from more productive investments without any tangible impact on the local areas. Further, it indebted poor people with no significant return, benefiting lenders most.

With mobile phones having penetrated into remote areas, linking poor people directly to traditional, regulated banks will not only be cheap but efficient too. At this time when the government is planning direct cash transfer to the poor, demand for small loans is likely to take a plunge and for rightful reasons too. Backing up such transformation with community-based financial institutions that prioritize sustainable local development, such as financial co-operatives and social venture capitalist funds, will engage the poor in productive ventures!

 
Disclaimer:
The views expressed above are personal and do not necessarily reflect the views of d-sector editorial team.
 

Sudhirendar Sharma  |  sudhirendarsharma@gmail.com

Dr Sudhirendar Sharma is an environmentalist and development analyst based in New Delhi. Formerly with the World Bank, Dr Sharma is an expert on water, a keen observer on climate change dynamics, and a critic of the contemporary development processes.

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Corruption Watch

The bad news is that corruption has not only sustained but has grown in size and stature in the country. With scams being a regular feature, seventy per cent respondents in a survey have rightfully opined that corruption has continued to increase in India. One in every two interviewed admit having paid a bribe for availing public services during last one year. Transparency International's latest survey reveals that the political parties top the chart for the most corrupt public institutions, followed by police force and legislatures. No wonder, India continues to make new records on the global corruption arena!

The shocking revelation is that the health and education sectors haven't remained untouched by this phenomenon. With 5th and 6th positions respectively for these sectors on the public perception chart on corruption, corruption has crept insidiously into these sectors of hope for the masses. With bureaucracy being fourth in the list of corrupt institutions in the country, corruption seems to have been non-formally institutionalized with little hope if public services would ever be effective in the country. With economic growth having literally institutionalized corruption, are we now expecting corrupt to be socially responsible - a different CSR.

Poor. Who?

Not giving 'aid' to India is one thing but calling it 'rich' is quite another. If one in three of the world's malnourished children live in India, what does average daily income of $3 indicate? It perhaps means that there is a relative decline in poverty - people are 'less poor' than what they used to be in the past. But having crossed the World Bank arbitrary threshold of $2 a day does not absolve the 'developed' countries of their obligation to part with 0.7 per cent of their Gross National Income in development aid. Should this three-decade old figure not be revised?  

An interesting debate in UK's House of Commons delved on future of development assistance by the British Government. While prioritizing limited resources has been a concern, there has been no denying the fact that development aid must be guided towards tangible gains over a short period of time to start with. There are difficult choices for elected governments to make - should they invest in long-term primary education or in short-term university scholarships? Which of these will bring gains and trigger long-term transformation in the society. As politicians continue to be divided on the matter, poverty persists!!   

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