Is Microfinance Helping or Hurting?
Rural women in their richly coloured saris meeting as members of microfinance self-help groups. Photo courtesy of mckaysavage on Flickr.
In part, Dr. Yunus was glorified for his ability to think outside the conventional model of philanthropy. He created a realistic design to answer the problem of poverty that was not based in charity, but instead based in capitalism and profit. He established microfinance as a legitimate means of lifting destitute women from developing countries out of their own cycle of poverty through a lending process based on social collateral rather than monetary collateral.
In essence, a microfinance institution gives a loan to a group of women ranging in number from five to twenty five. This money is divided amongst the women and they are intended to use it to make economic investments and build capital over time. The women do not give pecuniary collateral for their loans, which has hindered them from participating in the organized financial sector. The new form of social collateral has enabled women around the world to participate in financial ventures and this is the beauty of the microfinance model.
Logic would suggest that without collateral, such as jewelry or bonds, a person would default on a loan without thinking twice. However, in an MFI, if one woman does not pay her debt, the rest of the group is responsible for her portion of the payment. The defaulter’s identity rests in her connection to this group and if she does not repay, she will lose her social standing in her community.
The successes of microfinance institutions throughout the developing world is undeniable. They have become fixtures in small villages and poverty stricken towns and they provide women with more than money; they provide them with a sense of autonomy and purpose. Approximately a year ago I was a strong advocate for microfinance. I thought it was going to be the panacea, the change, the golden ticket that would cure all the world’s woes. I decided to venture off to India and get involved in this amazing new wave of socially responsible banking.
In Rajasthan I worked as an intern for a small emerging microfinance called Sahayata Livelihood. Sahayata provided small loans to the disadvantaged urban women of Udaipur and greater Rajasthan. Perhaps I should have gone into the experience without my rose colored glasses on, but as I began to grasp the true intentions of Sahayata, the rosy hue began to fade and reality set in. I began to realize that the pledge to social responsibility was not the objective of these lenders but simply a veil to cover the true goal: money, money and more money. The microfinance was in part a scam.
The lender would tell the uneducated urban women that they would be charging a twenty percent interest rate. Then they would turn around and tell potential investors interested in supplying the MFI with capital that they were getting a thirty six percent interest rate of return. The MFI did this by providing a fixed interest rate of twenty percent rather than a reducing balance interest rate. Therefore even if a woman owed two rupees on her loan, she would have to pay interest on the principal rather than her current balance. When I came to realize that I was not working for the greater good of society, but rather the greater good of a handful of investors, I was overwhelmed by anger, cynicism and severe disillusionment.
I started researching MFIs on “Saint Google” and came to realize that there was a large sampling of reports on money hungry, business savvy, predatory lenders that had jumped onto the microfinance bandwagon and were using the shroud of righteousness to exploit poor, unknowing, financially illiterate women. What I came to realize is that socially responsible capitalism is an inherent paradox. The chase of profit cannot be fettered by moral obligations. Microfinance institutions will always tilt in the direction of market principles rather than principles of social welfare. The most successful microfinance will be the one with the highest interest rate rather than the one with the highest number of success stories.
Investors around the world want to engage in corporate social responsibility, but if they had to choose between a more exploitative MFI and a more humanitarian one, nine times out of ten, the only factor that would matter is the rate of return rather than the rate of poverty. Microfinance provides financial opportunities to sectors of society that have been skipped over by the institutionalized banking sector. It is and will continue to be an important tool in the economic growth of developing countries. However, it must be re-characterized as a for-profit movement rather than a socially sensitive and morally bound means to alleviate poverty.
Well written, insightful and depressing. Is there any hope for responsible capitalism?
Great article, very insightful. Thanks for spreading the information.
Timely warning for those involved in development. But does this mean all microfinance is tarnished?
Very helpful article. Brings to light a model that both works tremendously well on the borrower end (if structured honestly) yet needs effective transparency and accountability – especially on the lender’s end. As the financing seems to be beneficial, the next step would seem to be better and more effectitve (and visible) regulation of the lenders.
It is interesting to see how socially sensitive people become when someone is watching. If we find ways of making these lending practices more visible and promoting awaremess of those lenders who are honest (while making a profit – which is possible), the social currency the lenders would garner would be valuable to them as well. Companies do work for a profit, so it is helpful to link social senstitivity to that profit incentive ie. the more socially aware a company is, the more business it will do and the more profit it will make. To divorce the two concepts would leave social senstivitly as the poor sister and allow the profit motive to run rampant without any social accountability. We need to drive home the belief that profit increases with social reponsibility. Promoting visibility when profit harms society is a vital step in the creation of that belief.
I too feel that microfinance can be an effective way to help the poor work their way out of poverty. I have been working at a microfinance institution in Costa Rica for half a year. We operate on a declining principal balance and all the “profits” go to the foundation, there are no investors who want to see more profits. I think it’s important to look at the organization. In Mexico, som MFI’s charge 90% interest. Muhammud Yunus has condemmed anything over 30%. From first hand experience, these women are greatful for these loans, I hope to find a way to reduce interest rates in the future. International funding might be a way.