Micro-finance: A clear dilemma of profit vs social objective

For the past eight years, in 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 upcoming event will focus 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 crises of social and financial legitimacy. 

Bad news for micro-finance hasn’t stopped pouring in 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.

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.

Current debate

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 capitalise on the prevailing situation. A recent study by the Deutsche Bank describes micro-finance as ‘a development programme 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. 

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 favourable 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 the poor people with no significant return for them, while benefiting the 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 prioritise sustainable local development, such as financial co-operatives and social venture capitalist funds, will engage the poor in productive ventures.

(The writer is development critic with The Ecological Foundation, New Delhi)

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