The microfinance revolution in the 1980 and 1990’s was hailed by some as a savior for the world’s poor; now surrounded by scandal and controversy it seems microfinance may be the one that needs saving. The current crisis in the microfinance industry raises the question what can or should be expected from the $70 billion global microfinance industry?
In the small southern African nation of Malawi, Boston Muhango, took a 20 000 kwacha ($50US) microfinance loan with hopes to set up his own business selling fish. Within two weeks creditors were already asking for 4000 kwacha repayment. Instead of spending the loan to start a fish business Muhango used the money to pay school fees and funeral costs. “It was very difficult to control what the money was spent on. Emergencies would happen and the money would be used for other purposes, which was bad and very stressful,” says Muhango.
Every two weeks debt collectors would knock on Muhango’s door for repayment. Under pressure he was forced to borrow money from other village members to pay back his loan. “It deeply affected my personal life. The whole family was under stress, a few days before paying back the loan I had to run around to find money so I would be able to pay it back. I had debts all over.” After two months Muhango’s loan was repaid in full including 10 000 kwacha in interest. No fish business had been started and the family owed loans to other villagers.
The crisis of microfinance
From Malawian farmers to Indian vendors, Muhango’s story is retold: high interest rates, stringent repayment plans, crippling stress and unfulfilled business plans. A different story from the one microfinance institutions have been telling: one of female empowerment, budding entrepreneurs and 99 percent loan repayment rate. But more recently microfinance has been criticized for being too focused on commercial interests, while skeptical economists are debunking the perceived benefits of microfinance.
Worldwide, microcredit loans reaches about 200 million people, leaving an overwhelming majority of those living below the poverty line without access to any form of formal credit. However, that doesn’t stop poor families from borrowing money, mainly from informal moneylenders and other community members.
A study in Pakistan found that 93 percent of rural households living on a dollar a day have loans, yet only a fraction of 1.5 percent of those loans came from banks. Throughout developing countries the poor rely on informal markets, which charge yearly interest rates between 40 to 200 percent. In the Indian state of Chennai fruit vendors pay 5 percent interest per day.
A growing trend has seen non-profit microfinance organizations becoming commercial enterprises, such as SKS Microfinance in India that raised $358 million in an initial public offering. SKS recently made headlines for aggressively collecting loan repayment from poverty-stricken families and allegedly driving 57 farmers to suicide due to unbearable pressures by loan officers. SKS charged poor women an interest rate of 30 to 65 percent and some borrowers became overly indebted. This led to 90 percent of its borrowers in the state of Andra Pradesh refusing to repay loans in 2010. Other microfinance institutions have reported similar cases. In order to ensure profits for investors, banks raise interest rates and resort to aggressive marketing and loan collection.
In an opinion piece in The New York Times, the father of microfinance and Nobel Peace Prize winner, Muhammad Yunus, was shocked by what commercialization has done to microfinance. He wrote, “I never imagined that one day microcredit would give rise to its own breed of loan sharks. Poverty should be eradicated, not seen as a money-making opportunity.” Yunus founded the Grameen Bank in 1983 to eliminate traditional moneylenders who charged the poor 50-60 percent interest and often used brutal methods to ensure repayment. Most of the world’s poor don’t have access to banks and savings accounts but have access to informal financial products, which have very high costs and risks. Microfinance can bridge this gap.
However, “microcredit does not automatically mean development, it might as well just let families survive when otherwise people would starve,” says Niclaus Bergmann, managing director of Sparkassenstiftung a German non-profit institution that has been working globally on microfinance projects. The surge of recent criticism isn’t towards “real” microfinance, says Bergmann. “Microfinance by definition needs to have a social objective. In most countries, any company can call itself a microfinance institution. They might work with the poor, give small loans – but overcharge their clients and don’t have a social objective. They are not real microfinance institutions. But of course it gives the term ‘microfinance’ a bad reputation.”
However, some proponents of microfinance commercialization say it’s needed to collect funds to expand microfinance projects and reduce dependence on charities. The main challenge for the microfinance industry is finding a balance, between being socially focused and economically sustainable. “Microfinance without a social objective is just banking. Microfinance without economic sustainability is social policy or charity. Banking and charity are fine, but microfinance is more than that,” says Bergmann. “That’s why I think doing microfinance in a responsible way is much more demanding and complicated than just being a profit-maximizing banker.”
The future of microfinance
The idea of microfinance has changed over the last decades. Today microfinance includes much more than loans, such as savings, insurance, money transfer and financial training and counseling. Despite recent backlash microcredit has had its share of success stories.
SHARE, a microfinance institution in India, lends groups of women, $50 to $100 to buy rickshaws for transporting wheat to market or to help them open Internet kiosks. With 200,000 clients mostly female, 77 percent have significantly raised their income level and 38 percent no longer fall below the poverty line.
Thriving institutions have redirected their attention to savings deposits and insurance for the poor. According to David Roodman, author of Due Diligence, “only 10% of people want microcredit loans, while more want savings account.” Bolivia’s BancoSol, was able to meet this need by splitting into two different institutions, one that focuses on microcredit, with 169,000 borrowers and another institution that focuses on savings, with 485,000 clients last year.
Microfinance should be neither an enormously profitable business nor a handout; it is a tool that recently has been given a bad name by self-serving profiteers. Yunus suggests the microfinance community “needs to reaffirm the original definition of microcredit, abandon commercialization and turn back to serving the poor. ”
Past studies suggests the poor have entrepreneurial talents to make microcredit work, but they often need larger loans and more flexible terms than microfinance provides, which is what Boston Muhango hopes for.
Despite his struggles with microfinance, Muhango is still convinced that microfinance can help poor Malawians and has a future in developing nations. “With some changes I would use microfinance again. It helped me pay school fees and deal with emergencies. Maybe next time my fish business will make me a millionaire.”
Text and photo by Nina Lex
