Microfinance and poverty

Financial needs and financial services.

In developing economies and particularly in rural areas, many activities that would be classified
in the developed world as financial are not monetized: that is, money is not used to carry them
out. This is often the case when people need the services money can provide but do not have
dispensable funds required for those services, forcing them to revert to other means of acquiring
them. In their book The Poor and Their Money, Stuart Rutherford and Sukhwinder Arora cite
several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, home building,

widowhood and old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or

death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving

housing, securing a job (which often requires paying a large bribe), etc.[3]

People find creative and often collaborative ways to meet these needs, primarily through creating
and exchanging different forms of non-cash value. Common substitutes for cash vary from
country to country but typically include livestock, grains, jewelry and precious metals. As
Marguerite Robinson describes in The Micro finance Revolution, the 1980s demonstrated that
"micro finance could provide large-scale outreach profitably," and in the 1990s, "micro finance
began to develop as an industry" (2001, p. 54). In the 2000s, the micro finance industry's
objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing
poverty. While much progress has been made in developing a viable, commercial micro finance
sector in the last few decades, several issues remain that need to be addressed before the industry
will be able to satisfy massive worldwide demand. The obstacles or challenges to building a
sound commercial micro finance industry include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-taking micro finance institutions (MFIs)

1

Few MFIs that meet the needs for savings, remittances or insurance

Limited management capacity in MFIs

Institutional inefficiencies

Need for more dissemination and adoption of rural, agricultural micro finance
methodologies

Microfinance is the proper tool to reduce income inequality, allowing citizens from lower socioeconomical classes to participate in the economy. Moreover, its involvement has shown to lead to
a downward trend in income inequality (Hermes, 2014).[4]

Ways in which poor people manage their money

Saving up
Rutherford argues that the basic problem poor people as money managers face is to gather a
'usefully large' amount of money. Building a new home may involve saving and protecting
diverse building materials for years until enough are available to proceed with construction.
Childrens schooling may be funded by buying chickens and raising them for sale as needed for
expenses, uniforms, bribes, etc. Because all the value is accumulated before it is needed, this
money management strategy is referred to as 'saving up'.[citation needed]
Often, people don't have enough money when they face a need, so they borrow. A poor family
might borrow from relatives to buy land, from a moneylender to buy rice, or from a microfinance
institution to buy a sewing machine. Since these loans must be repaid by saving after the cost is
incurred, Rutherford calls this 'saving down'. Rutherford's point is that microcredit is addressing
only half the problem, and arguably the less important half: poor people borrow to help them
save and accumulate assets. Microcredit institutions should fund their loans through savings
accounts that help poor people manage their myriad risks.[citation needed]

Saving down
Most needs are met through a mix of saving and credit. A benchmark impact assessment of
Grameen Bank and two other large microfinance institutions in Bangladesh found that for every
$1 they were lending to clients to finance rural non-farm micro-enterprise, about $2.50 came
from other sources, mostly their clients' savings.[5] This parallels the experience in the West, in
which family businesses are funded mostly from savings, especially during start-up.
Recent studies have also shown that informal methods of saving are unsafe. For example, a study
by Wright and Mutesasira in Uganda concluded that "those with no option but to save in the
informal sector are almost bound to lose some moneyprobably around one quarter of what
they save there."[6]
The work of Rutherford, Wright and others has caused practitioners to reconsider a key aspect of
the microcredit paradigm: that poor people get out of poverty by borrowing, building
microenterprises and increasing their income. The new paradigm places more attention on the
efforts of poor people to reduce their many vulnerabilities by keeping more of what they earn
and building up their assets. While they need loans, they may find it as useful to borrow for
consumption as for microenterprise. A safe, flexible place to save money and withdraw it when
needed is also essential for managing household and family risk.[citation needed]

Examples
The microfinance project of "saving up" is exemplified in the slums of the south-eastern city of
Vijayawada, India. This microfinance project functions as an unofficial banking system where
Jyothi, a "deposit collector", collects money from slum dwellers, mostly women, in order for
them to accumulate savings. Jyothi does her rounds throughout the city, collecting Rs5 a day
from people in the slums for 220 days, however not always 220 days in a row since these women
do not always have the funds available to put them into savings. They ultimately end up with
Rs1000 at the end of the process. However, there are some issues with this microfinance saving
program. One of the issues is that while saving, clients are actually losing part of their savings.
Jyothi takes interest from each clientabout 20 out of every 220 payments, or Rs100 out of
1,100 or 8%. When these slum dwellers find someone they trust, they are willing to pay up to
30% to someone to safely collect and keep their savings. There is also the risk of entrusting their
savings to unlicensed, informal, peripatetic collectors. However, the slum dwellers are willing to
accept this risk because they are unable to save at home, and unable to use the remote and
unfriendly banks in their country. This microfinance project also has many benefits, such as
empowering women and giving parents the ability to save money for their childrens education.
3

This specific microfinance project is a great example of the benefits and limitations of the
"saving up" project (Rutherford, 2009).

Microfinance debates and challenges

There are several key debates at the boundaries of microfinance.

Interest rates

This shop in South Sudan was opened using money borrowed from the Finance Sudan Limited
(FSL) Program. This program was established in 2006 as one of the only microfinance lenders in
the country.
One of the principal challenges of microfinance is providing small loans at an affordable cost.
The global average interest and fee rate is estimated at 37%, with rates reaching as high as 70%
in some markets.[7] The reason for the high interest rates is not primarily cost of capital. Indeed,
the local microfinance organizations that receive zero-interest loan capital from the online
microlending platform Kiva charge average interest and fee rates of 35.21%.[8] Rather, the main
reason for the high cost of microfinance loans is the high transaction cost of traditional
microfinance operations relative to loan size.[9]
Microfinance practitioners have long argued that such high interest rates are simply unavoidable,
because the cost of making each loan cannot be reduced below a certain level while still allowing
the lender to cover costs such as offices and staff salaries. For example, in Sub-Saharan Africa
credit risk for microfinance institutes is very high, because customers need years to improve their
livelihood and face many challenges during this time. Financial institutes often do not even have
a system to check the person's identity. Additionally they are unable to design new products and
enlarge their business to reduce the risk.[10] The result is that the traditional approach to
microfinance has made only limited progress in resolving the problem it purports to address: that
the world's poorest people pay the world's highest cost for small business growth capital. The
high costs of traditional microfinance loans limit their effectiveness as a poverty-fighting tool.
Offering loans at interest and fee rates of 37% mean that borrowers who do not manage to earn at
least a 37% rate of return may actually end up poorer as a result of accepting the loans.[11]

Example of a loan contract, using flat rate calculation, from rural Cambodia. Loan is for 400,000
riels at 4% flat (16,000 riels) interest per month.
According to a recent survey of microfinance borrowers in Ghana published by the Center for
Financial Inclusion, more than one-third of borrowers surveyed reported struggling to repay their
loans. Some resorted to measures such as reducing their food intake or taking children out of
school in order to repay microfinance debts that had not proven sufficiently profitable.[citation needed]
In recent years, the microfinance industry has shifted its focus from the objective of increasing
the volume of lending capital available, to address the challenge of providing microfinance loans
more affordably. Microfinance analyst David Roodman contends that, in mature markets, the
average interest and fee rates charged by microfinance institutions tend to fall over time.[12]
However, global average interest rates for microfinance loans are still well above 30%.
The answer to providing microfinance services at an affordable cost may lie in rethinking one of
the fundamental assumptions underlying microfinance: that microfinance borrowers need
extensive monitoring and interaction with loan officers in order to benefit from and repay their
loans. The P2P microlending service Zidisha is based on this premise, facilitating direct
interaction between individual lenders and borrowers via an internet community rather than
physical offices. Zidisha has managed to bring the cost of microloans to below 10% for
borrowers, including interest which is paid out to lenders. However, it remains to be seen
whether such radical alternative models can reach the scale necessary to compete with traditional
microfinance programs.[13]

Use of loans
Practitioners and donors from the charitable side of microfinance frequently argue for restricting
microcredit to loans for productive purposessuch as to start or expand a microenterprise.
Those from the private-sector side respond that, because money is fungible, such a restriction is
impossible to enforce, and that in any case it should not be up to rich people to determine how
poor people use their money[citation needed].

Reach versus depth of impact

These goats are being raised by Rwandan women as part of a farm cooperative funded by
microfinance.
There has been a long-standing debate over the sharpness of the trade-off between 'outreach' (the
ability of a microfinance institution to reach poorer and more remote people) and its
'sustainability' (its ability to cover its operating costsand possibly also its costs of serving new
clientsfrom its operating revenues). Although it is generally agreed that microfinance
practitioners should seek to balance these goals to some extent, there are a wide variety of
strategies, ranging from the minimalist profit-orientation of BancoSol in Bolivia to the highly
integrated not-for-profit orientation of BRAC in Bangladesh. This is true not only for individual
institutions, but also for governments engaged in developing national microfinance systems.

Gender
Microfinance experts generally agree that women should be the primary focus of service
delivery. Evidence shows that they are less likely to default on their loans than men. Industry
data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs using the solidarity
lending methodology (99.3% female clients) and MFIs using individual lending (51% female
clients). The delinquency rate for solidarity lending was 0.9% after 30 days (individual lending
3.1%), while 0.3% of loans were written off (individual lending0.9%).[14] Because operating
margins become tighter the smaller the loans delivered, many MFIs consider the risk of lending
to men to be too high. This focus on women is questioned sometimes, however a recent study of
microenterpreneurs from Sri Lanka published by the World Bank found that the return on capital
for male-owned businesses (half of the sample) averaged 11%, whereas the return for womenowned businesses was 0% or slightly negative.[15]
Microfinance's emphasis on female-oriented lending is the subject of controversy, as it is claimed
that microfinance improves the status of women through an alleviation of poverty. It is argued
that by providing women with initial capital, they will be able to support themselves independent
of men, in a manner which would encourage sustainable growth of enterprise and eventual selfsufficiency. This claim has yet to be proven in any substantial form. Moreover, the attraction of
women as a potential investment base is precisely because they are constrained by socio-cultural
norms regarding such concepts of obedience, familial duty, household maintenance and passivity.
[16]
The result of these norms is that while micro-lending may enable women to improve their
daily subsistence to a more steady pace, they will not be able to engage in market-oriented
business practice beyond a limited scope of low-skilled, low-earning, informal work.[17] Part of
this is a lack of permissivity in the society; part a reflection of the added burdens of household
6

maintenance that women shoulder alone as a result of microfinancial empowerment; and part a
lack of training and education surrounding gendered conceptions of economics. In particular, the
shift in norms such that women continue to be responsible for all the domestic private sphere
labour as well as undertaking public economic support for their families, independent of male aid
increases rather than decreases burdens on already limited persons.
If there were to be an exchange of labour, or if women's income were supplemental rather than
essential to household maintenance, there might be some truth to claims of establishing longterm businesses; however when so constrained it is impossible for women to do more than pay
off a current loan only to take on another in a cyclic pattern which is beneficial to the financier
but hardly to the borrower. This gender essentializing crosses over from institutionalized lenders
such as the Grameen Bank into interpersonal direct lending through charitable crowd-funding
operations, such as Kiva. More recently, the popularity of non-profit global online lending has
grown, suggesting that a redress of gender norms might be instituted through individual selection
fomented by the processes of such programs, but the reality is as yet uncertain. Studies have
noted that the likelihood of lending to women, individually or in groups, is 38% higher than rates
of lending to men.[18]
This is also due to a general trend for interpersonal microfinance relations to be conducted on
grounds of similarity and internal/external recognition: lenders want to see something familiar,
something supportable in potential borrowers, so an emphasis on family, goals of education and
health, and a commitment to community all achieve positive results from prospective financiers.
[19]
Unfortunately, these labels disproportionately align with women rather than men, particularly
in the developing world. The result is that microfinance continues to rely on restrictive gender
norms rather than seek to subvert them through economic redress in terms of foundation change:
training, business management and financial education are all elements which might be included
in parameters of female-aimed loans and until they are the fundamental reality of women as a
disadvantaged section of societies in developing states will go untested.

Benefits and limitations

Microfinancing produces many benefits for poverty stricken, or low- income households. One of
the benefits is that it is very accessible. Banks today simply wont extend loans to those with
little to no assets, and generally dont engage in small size loans typically associated with
microfinancing. Through microfinancing small loans are produced and accessible.
Microfinancing is based on the philosophy that even small amounts of credit can help end the
cycle of poverty. Another benefit produced from the microfinancing initiative is that it presents
opportunities, such as extending education and jobs. Families receiving microfinancing are less
likely to pull their children out of school for economic reasons. As well, in relation to
employment, people are more likely to open small businesses that will aid the creation of new
jobs. Overall, the benefits outline that the microfinancing initiative is set out to improve the
standard of living amongst impoverished communities (Rutherford, 2009).
There are also many challenges within microfinance initiatives which may be social or financial.
Here, more articulate and better-off community members may cheat poorer or less-educated
neighbours. This may occur intentionally or inadvertently through loosely run organizations. As
7

a result, many microfinance initiatives require a large amount of social capital or trust in order to
work effectively. The ability of poorer people to save may also fluctuate over time as unexpected
costs may take priority which could result in them being able to save little or nothing some
weeks. Rates of inflation may cause funds to lose their value, thus financially harming the saver
and not benefiting collector (Rutherford, 2009).

History of microfinance
Over the past centuries, practical visionaries, from the Franciscan monks who founded the
community-oriented pawnshops of the 15th century to the founders of the European credit union
movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the founders of the
microcredit movement in the 1970s (such as Muhammad Yunus and Al Whittaker), have tested
practices and built institutions designed to bring the kinds of opportunities and risk-management
tools that financial services can provide to the doorsteps of poor people.[20] While the success of
the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the
world,[citation needed] it has proved difficult to replicate this success. In nations with lower population
densities, meeting the operating costs of a retail branch by serving nearby customers has proven
considerably more challenging. Hans Dieter Seibel, board member of the European Microfinance
Platform, is in favour of the group model. This particular model (used by many Microfinance
institutions) makes financial sense, he says, because it reduces transaction costs. Microfinance
programmes also need to be based on local funds.[21]
The history of microfinancing can be traced back as far as the middle of the 1800s, when the
theorist Lysander Spooner was writing about the benefits of small credits to entrepreneurs and
farmers as a way of getting the people out of poverty. Independently of Spooner, Friedrich
Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural
Germany.[22]
The modern use of the expression "microfinancing" has roots in the 1970s when organizations,
such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were
starting and shaping the modern industry of microfinancing. Another pioneer in this sector is
Akhtar Hameed Khan.

Microfinance standards and principles

A group of Indian women have assembled to make bamboo products that they intend to resell.

Poor people borrow from informal moneylenders and save with informal collectors. They receive
loans and grants from charities. They buy insurance from state-owned companies. They receive
funds transfers through formal or informal remittance networks. It is not easy to distinguish
microfinance from similar activities. It could be claimed that a government that orders state
banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a
charity that runs a heifer pool are engaged in microfinance. Ensuring financial services to poor
people is best done by expanding the number of financial institutions available to them, as well
as by strengthening the capacity of those institutions. In recent years there has also been
increasing emphasis on expanding the diversity of institutions, since different institutions serve
different needs.
Some principles that summarize a century and a half of development practice were encapsulated
in 2004 by CGAP and endorsed by the Group of Eight leaders at the G8 Summit on June 10,
2004:[20]
1. Poor people need not just loans but also savings, insurance and money transfer services.
2. Microfinance must be useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
3. "Microfinance can pay for itself."[23] Subsidies from donors and government are scarce
and uncertain and so, to reach large numbers of poor people, microfinance must pay for
itself.
4. Microfinance means building permanent local institutions.
5. Microfinance also means integrating the financial needs of poor people into a country's
mainstream financial system.
6. "The job of government is to enable financial services, not to provide them."[24]
7. "Donor funds should complement private capital, not compete with it."[24]
8. "The key bottleneck is the shortage of strong institutions and managers."[24] Donors
should focus on capacity building.
9. Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.
10. Microfinance institutions should measure and disclose their performanceboth
financially and socially.
Microfinance is considered a tool for socio-economic development, and can be clearly
distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to
generate the cash flow required to repay a loan, should be recipients of charity. Others are best
served by financial institutions.
9

Scale of microfinance operations

Two women talk about financial matters. The woman on the right is a loan officer for the Small
Enterprise Foundation (SEF). The conversation shown is taking place in Tzaneen, South Africa
in February 2010.
No systematic effort to map the distribution of microfinance has yet been undertaken. A
benchmark was established by an analysis of 'alternative financial institutions' in the developing
world in 2004.[25] The authors counted approximately 665 million client accounts at over 3,000
institutions that are serving people who are poorer than those served by the commercial banks.
Of these accounts, 120 million were with institutions normally understood to practice
microfinance. Reflecting the diverse historical roots of the movement, however, they also
included postal savings banks (318 million accounts), state agricultural and development banks
(172 million accounts), financial cooperatives and credit unions (35 million accounts) and
specialized rural banks (19 million accounts).
Regionally, the highest concentration of these accounts was in India (188 million accounts
representing 18% of the total national population). The lowest concentrations were in Latin
America and the Caribbean (14 million accounts representing 3% of the total population) and
Africa (27 million accounts representing 4% of the total population, with the highest rate of
penetration in West Africa, and the highest growth rate in Eastern and Southern Africa [26] ).
Considering that most bank clients in the developed world need several active accounts to keep
their affairs in order, these figures indicate that the task the microfinance movement has set for
itself is still very far from finished.
By type of service, "savings accounts in alternative finance institutions outnumber loans by
about four to one. This is a worldwide pattern that does not vary much by region."[27]
An important source of detailed data on selected microfinance institutions is the MicroBanking
Bulletin, which is published by Microfinance Information Exchange. At the end of 2009, it was
tracking 1,084 MFIs that were serving 74 million borrowers ($38 billion in outstanding loans)
and 67 million savers ($23 billion in deposits).[28]
Another source of information regarding the environment of microfinance is the Global
Microscope on the Microfinance Business Environment,[29] prepared by the Economist
Intelligence Unit (EIU), the Inter-American Development Bank, and others. The 2011 report
contains information on the environment of microfinance in 55 countries among two categories,
10

Regulatory Framework and the Supporting Institutional Framework.[30] This publication, also
known as the Microscope, was first developed in 2007, focusing only on Latin America and the
Caribbean, but by 2009, this report had become a global study.[31]
As yet there are no studies that indicate the scale or distribution of 'informal' microfinance
organizations like ROSCA's and informal associations that help people manage costs like
weddings, funerals and sickness. Numerous case studies have been published, however,
indicating that these organizations, which are generally designed and managed by poor people
themselves with little outside help, operate in most countries in the developing world.[32]
Help can come in the form of more and better-qualified staff, thus higher education is needed for
microfinance institutions. This has begun in some universities, as Oliver Schmidt describes.
Mind the management gap

Microfinance in the United States and Canada

In Canada and the US, microfinance organizations target marginalized populations unable to
access mainstream bank financing. Close to 8% of Americans are unbanked, meaning around 9
million are without any kind of bank account or formal financial services.[33] Most of these
institutions are structured as nonprofit organizations.[34] Microloans in the U.S. context is defined
as the extension of credit up to $50,000.[35] In Canada, CRA guidelines restrict microfinance
loans to a maximum of $25,000.[36][37] The average microfinance loan size in the US is US$9,732,
ten times the size of an average microfinance loan in developing countries (US$973).[34]

Impact
While all microfinance institutions aim at increasing incomes and employment, in developing
countries the empowerment of women, improved nutrition and improved education of the
borrowers children are frequently aims of microfinance institutions. In the US and Canada, aims
of microfinance include the graduation of recipients from welfare programs and an improvement
in their credit rating. In the US, microfinance has created jobs directly and indirectly, as 60% of
borrowers were able to hire others.[38] According to reports, every domestic microfinance loan
creates 2.4 jobs.[39] These entrepreneurs provide wages that are, on average, 25% higher than
minimum wage.[39] Small business loans eventually allow small business owners to make their
businesses their primary source of income, with 67% of the borrowers showing a significant
increase in their income as a result of their participation in certain micro-loan programs.[38] In
addition, these business owners are able to improve their housing situation, 70% indicating their
housing has improved.[38] Ultimately, many of the small business owners that use social funding
are able to graduate from government funding.[38]

United States
In the late 1980s, microfinance institutions developed in the United States. They served lowincome and marginalized minority communities. By 2007, there were 500 microfinance
organizations operating in the US with 200 lending capital.[34]
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There were three key factors that triggered the growth in domestic microfinance:
1. Change in social welfare policies and focus on economic development and job creation at
the macro level.
2. Encouragement of employment, including self-employment, as a strategy for improving
the lives of the poor.
3. The increase in the proportion of Latin American and Asian immigrants who came from
societies where microenterprises are prevalent.
These factors incentivized the public and private supports to have microlending activity in the
United States.[34]
Selected microfinance institutions in the United States are:

Accion U.S. Network

The Accion U.S. Network, an affiliate of Accion International, offers microloans and other
financial services to low- and moderate-income entrepreneurs for their small businesses who
cannot get financial support through traditional means.

Project Enterprise

Founded in 1997 in New York City, Project Enterprise provides support to entrepreneurs and
small businesses in lower income communities through access to business loans, business
development services, and networking opportunities.

Grameen America

Based in New York and founded by Muhammed Yunus, Grameen America provides micro-loans,
savings programs, financial education, and credit establishment to low-income entrepreneurs.

Capital Good Fund

An example of a Microfinance startup, this organization was founded by two Brown University
students in 2009. Based in Providence, Rhode Island, CGF provides credit-building business and
consumer loans, financial coaching, and free tax preparation.[40]

RISE Financial Pathways (formerly Community Financial Resource Center)

Based in Los Angeles, this first public-private partnership of its kind provides micro-loans,
SEED/expansion loans, high interest savings accounts, financial education & counseling to low
and moderate income entrepreneurs and disinvested communities.[41]

12

Canada
Microfinance in Canada took shape through the development of credit unions. These credit
unions provided financial services to the Canadians who could not get access to traditional
financial means. Two separate branches of credit unions developed in Canada to serve the
financially marginalized segment of the population. Alphonse Desjardins introduced the
establishment of savings and credit services in late 1900 to the Quebecois who did not have
financial access. Approximately 30 years later Father Moses Coady introduced credit unions to
Nova Scotia. These were the models of the modern institutions still present in Canada today.[42]
Efforts to transfer specific microfinance innovations such as solidarity lending from developing
countries to Canada have met with little success.[43]
Complications specific to Canada include the need for loans of a substantial size in comparison
to the ones typically seen in many international microfinance initiatives. Microfinance is also
limited by the rules and limitations surrounding money-lending. For example, Canada Revenue
Agency limits the loans made in these sort of transactions to a maximum of $25,000. As a result,
many people look to banks to provide these loans. Also, microfinance in Canada is driven by
profit which, as a result, fails to advance the social development of community members. Within
marginalized or impoverished Canadian communities, banks may not be readily accessible to
deposit or take out funds. These banks which would have charged little or no interest on small
amounts of cash are replaced by lending companies. Here, these companies may charge
extremely large interest rates to marginalized community members thus increasing the cycle of
poverty and profiting off of anothers loss (Rutherford, 2009).
Selected microfinance institutions in Canada are:

Rise Asset Development

Founded by Sandra Rotman in 2009, Rise is a Rotman and CAMH initiative that provides small
business loans, leases, and lines of credit to entrepreneurs with mental health and/or addiction
challenges.

Alterna Savings

Formed in 2005 through the merging of the Civil Service Savings and Loan Society and the
Metro Credit Union, Alterna is a financial alternative to Canadians. Their banking policy is based
on cooperative values and expert financial advising.

Access Community Capital Fund

Based in Toronto, Ontario, ACCESS is a Canadian charity that helps entrepreneurs without
collateral or credit history find affordable small loans.

Montreal Community Loan Fund

13

Created to help eradicate poverty, Montreal Community Loan Fund provides accessible credit
and technical support to entrepreneurs with low income or credit for start-ups or expansion of
organizations that cannot access traditional forms of credit.

Momentum

Using the community economic development approach, Momentum offers opportunities to

people living in poverty in Calgary. Momentum provides individuals and families who want to
better their financial situation take control of finances, become computer literate, secure
employment, borrow and repay loans for business, and purchase homes.

Vancity

Founded in 1946, Vancity is now the largest English speaking credit union in Canada.

Micro Finance on the Indian Subcontinent

Loans to poor people by banks have many limitations including lack of security and high
operating costs. As a result, microfinance was developed as an alternative to provide loans to
poor people with the goal of creating financial inclusion and equality.
Muhammad Yunus, a Nobel Prize winner, introduced the concept of Microfinance in
Bangladesh in the form of the "Grameen Bank". The National Bank for Agriculture and Rural
Development (NABARD) took this idea and started the concept of microfinance in India. Under
this mechanism, there exists a link between SHGs (Self-help groups), NGOs and banks. SHGs
are formed and nurtured by NGOs and only after accomplishing a certain level of maturity in
terms of their internal thrift and credit operations are they entitled to seek credit from the banks.
There is an involvement from the concerned NGO before and even after the SHG-Bank linkage.
The SHG-Bank linkage programme, which has been in place since 1992 in India, has provided
about 22.4 lakh for SHG finance by 2006.[needs update] It involves commercial banks, regional rural
banks (RRBs) and cooperative banks in its operations.
Microfinance is defined as, financial services such as savings accounts, insurance funds and
credit provided to poor and low income clients so as to help them increase their income, thereby
improving their standard of living.
In this context the main features of microfinance are:

Loan given without security

Loans to those people who live below the poverty line

Members of SHGs may benefit from micro finance

Maximum limit of loan under micro finance 25,000/14

Terms and conditions offered to poor people are decided by NGOs

Microfinance is different from Microcredit- under the latter, small loans are given to the
borrower but under microfinance alongside many other financial services including
savings accounts and insurance. Therefore, microfinance has a wider concept than
microcredit.

In June 2014, CRISIL released its latest report on the Indian Microfinance Sector titled "India's
25 Leading MFI's".[44] This list is the most comprehensive and up to date overview of the
microfinance sector in India and the different microfinance institutions operating in the subcontinent.
Many loan officers in India create emotional connection with borrowers before loan reaches
maturity by mentioning details about borrowers personal life and family and also demonstrating
affection in many different ways as a strategy to generate pressure during recovery.[45]

"Inclusive financial systems"

The microcredit era that began in the 1970s has lost its momentum, to be replaced by a 'financial
systems' approach. While microcredit achieved a great deal, especially in urban and near-urban
areas and with entrepreneurial families, its progress in delivering financial services in less
densely populated rural areas has been slow.
The new financial systems approach pragmatically acknowledges the richness of centuries of
microfinance history and the immense diversity of institutions serving poor people in developing
world today. It is also rooted in an increasing awareness of diversity of the financial service
needs of the worlds poorest people, and the diverse settings in which they live and work.
Brigit Helms in her book 'Access for All: Building Inclusive Financial Systems', distinguishes
between four general categories of microfinance providers, and argues for a pro-active strategy
of engagement with all of them to help them achieve the goals of the microfinance movement.[46]
Informal financial service providers
These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs,
ASCAs and input supply shops. Because they know each other well and live in the same
community, they understand each others financial circumstances and can offer very
flexible, convenient and fast services. These services can also be costly and the choice of
financial products limited and very short-term. Informal services that involve savings are
also risky; many people lose their money.
Member-owned organizations
These include self-help groups, credit unions, and a variety of hybrid organizations like
'financial service associations' and CVECAs. Like their informal cousins, they are
generally small and local, which means they have access to good knowledge about each
other's financial circumstances and can offer convenience and flexibility. Grameen Bank
is a member-owned organization. Since they are managed by poor people, their costs of
operation are low. However, these providers may have little financial skill and can run
15

into trouble when the economy turns down or their operations become too complex.
Unless they are effectively regulated and supervised, they can be 'captured' by one or two
influential leaders, and the members can lose their money.
NGOs
The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to
about 133 million clients by the end of 2006.[47] Led by Grameen Bank and BRAC in
Bangladesh, Prodem in Bolivia, Opportunity International, and FINCA International,
headquartered in Washington, DC, these NGOs have spread around the developing world
in the past three decades; others, like the Gamelan Council, address larger regions. They
have proven very innovative, pioneering banking techniques like solidarity lending,
village banking and mobile banking that have overcome barriers to serving poor
populations. However, with boards that dont necessarily represent either their capital or
their customers, their governance structures can be fragile, and they can become overly
dependent on external donors.
Formal financial institutions
In addition to commercial banks, these include state banks, agricultural development
banks, savings banks, rural banks and non-bank financial institutions. They are regulated
and supervised, offer a wider range of financial services, and control a branch network
that can extend across the country and internationally. However, they have proved
reluctant to adopt social missions, and due to their high costs of operation, often can't
deliver services to poor or remote populations. The increasing use of alternative data in
credit scoring, such as trade credit is increasing commercial banks' interest in
microfinance.[48]
With appropriate regulation and supervision, each of these institutional types can bring leverage
to solving the microfinance problem. For example, efforts are being made to link self-help
groups to commercial banks, to network member-owned organizations together to achieve
economies of scale and scope, and to support efforts by commercial banks to 'down-scale' by
integrating mobile banking and e-payment technologies into their extensive branch networks.

Microcredit and the web

Due to the unbalanced emphasis on credit at the expense of microsavings, as well as a desire to
link Western investors to the sector, peer-to-peer platforms have developed to expand the
availability of microcredit through individual lenders in the developed world. New platforms that
connect lenders to micro-entrepreneurs are emerging on the Web, for example MYC4, Kiva,
Zidisha, myELEN, Opportunity International and the Microloan Foundation. Another Web-based
microlender United Prosperity uses a variation on the usual microlending model; with United
Prosperity the micro-lender provides a guarantee to a local bank which then lends back double
that amount to the micro-entrepreneur. In 2009, the US-based nonprofit Zidisha became the first
peer-to-peer microlending platform to link lenders and borrowers directly across international
borders without local intermediaries.[49]
The volume channeled through Kiva's peer-to-peer platform is about $100 million as of
November 2009 (Kiva facilitates approximately $5M in loans each month). In comparison, the
needs for microcredit are estimated about 250 bn USD as of end 2006.[50] Most experts agree that
16

these funds must be sourced locally in countries that are originating microcredit, to reduce
transaction costs and exchange rate risks.
There have been problems with disclosure on peer-to-peer sites, with some reporting interest
rates of borrowers using the flat rate methodology instead of the familiar banking Annual
Percentage Rate.[51] The use of flat rates, which has been outlawed among regulated financial
institutions in developed countries, can confuse individual lenders into believing their borrower
is paying a lower interest rate than, in fact, they are.[citation needed]

Microfinance and social interventions

There are currently a few social interventions that have been combined with micro financing to
increase awareness of HIV/AIDS. Such interventions like the "Intervention with Microfinance
for AIDS and Gender Equity" (IMAGE) which incorporates microfinancing with "The Sistersfor-Life" program a participatory program that educates on different gender roles, gender-based
violence, and HIV/AIDS infections to strengthen the communication skills and leadership of
women [52] "The Sisters-for-Life" program has two phases where phase one consists of ten onehour training programs with a facilitator with phase two consisting of identifying a leader
amongst the group, train them further, and allow them to implement an Action Plan to their
respective centres.
Microfinance has also been combined with business education and with other packages of health
interventions.[53] A project undertaken in Peru by Innovations for Poverty Action found that those
borrowers randomly selected to receive financial training as part of their borrowing group
meetings had higher profits, although there was not a reduction in "the proportion who reported
having problems in their business".[54] Pro Mujer, a non-governmental organisation (NGO) with
operations in five Latin American countries, combines microfinance and healthcare. This
approach shows, that microfinance can not only help businesses to prosper; it can also foster
human development and social security. Pro Mujer uses a "one-stop shop" approach, which
means in one building, the clients find financial services, business training, empowerment advice
and healthcare services combined.[55]

Impact and criticism

Most criticisms of microfinance have actually been criticisms of microcredit. Criticism focuses
on the impact on poverty, the level of interest rates, high profits, overindebtedness and suicides.
Other criticism include the role of foreign donors and working conditions in companies affiliated
to microfinance institutions, particularly in Bangladesh.

Impact
For more details on this topic, see Impact of microcredit.
The impact of microcredit is a subject of much controversy. Proponents state that it reduces
poverty through higher employment and higher incomes. This is expected to lead to improved
17

nutrition and improved education of the borrowers' children. Some argue that microcredit
empowers women. In the US and Canada, it is argued that microcredit helps recipients to
graduate from welfare programs.
Critics say that microcredit has not increased incomes, but has driven poor households into a
debt trap, in some cases even leading to suicide. They add that the money from loans is often
used for durable consumer goods or consumption instead of being used for productive
investments, that it fails to empower women, and that it has not improved health or education.
Moreover, as the access to micro-loans is widespread, borrowers tend to acquire several loans
from different companies, making it nearly impossible to pay the debt back.[56] As a result of such
tragic events, microfinance institutions in India have agreed on setting an interest rate ceiling of
15 percent.[57]
The available evidence indicates that in many cases microcredit has facilitated the creation and
the growth of businesses. It has often generated self-employment, but it has not necessarily
increased incomes after interest payments. In some cases it has driven borrowers into debt traps.
There is no evidence that microcredit has empowered women. In short, microcredit has achieved
much less than what its proponents said it would achieve, but its negative impacts have not been
as drastic as some critics have argued. Microcredit is just one factor influencing the success of
small businesses, whose success is influenced to a much larger extent by how much an economy
or a particular market grows.

Mission drift in microfinance

Mission drift refers to the phenomena through which the MFIs or the micro finance institutions
increasingly try to cater to customers who are better off than their original customers, primarily
the poor families. Roy Mersland and R. ystein Strm in their research on Mission Drift suggest
that this selection bias can come not only through an increase in the average loan size, which
allows for financially stronger individuals to get the loans, but also through MFI's particular
lending methodology, main market of operation, or even the gender bias as further mission drift
measures.[58] And as it may follow, this selective funding would lead to lower risks and lower
costs for the firm.
However, economists Beatriz Armendriz and Ariane Szafarz suggests that this phenomenon is
not driven by cost minimization alone. She suggests that it happens because of the interplay
between the companys mission, the cost differential between poor and unbanked wealthier
clients and region specific characteristics pertaining the heterogeneity of their clientele.[59] But in
either way, this problem of selective funding leads to an ethical tradeoff where on one hand there
is an economic reason for the company to restrict its loans to only the individuals who qualify
the standards, and on the other hand there is an ethical responsibility to help the poor people get
out of poverty through the provision of capital.

Role of foreign donors

The role of donors has also been questioned. CGAP recently commented that "a large proportion
of the money they spend is not effective, either because it gets hung up in unsuccessful and often
18

complicated funding mechanisms (for example, a government apex facility), or it goes to

partners that are not held accountable for performance. In some cases, poorly conceived
programs have retarded the development of inclusive financial systems by distorting markets and
displacing domestic commercial initiatives with cheap or free money."[60]

Working conditions in enterprises affiliated to MFIs

There has also been criticism of microlenders for not taking more responsibility for the working
conditions of poor households, particularly when borrowers become quasi-wage labourers,
selling crafts or agricultural produce through an organization controlled by the MFI. The desire
of MFIs to help their borrower diversify and increase their incomes has sparked this type of
relationship in several countries, most notably Bangladesh, where hundreds of thousands of
borrowers effectively work as wage labourers for the marketing subsidiaries of Grameen Bank or
BRAC. Critics maintain that there are few if any rules or standards in these cases governing
working hours, holidays, working conditions, safety or child labour, and few inspection regimes
to correct abuses.[61] Some of these concerns have been taken up by unions and socially
responsible investment advocates.
The Andhra Pradesh crisis has been something of a turning point in public assessment of
microfinance, with a suicide wave caused by widespread overindebtedness badly tarnishing the
sectors image in India as well as abroad. Some Indian politicians are now beginning to identify
the idea of alleviating poverty with microfinance as crap.

Source: MCRIL Microfinance Review 2012 (vii)

Microfinance in India remains in protracted decline since 2010 (see graph), although talk of
green shoots and catharsis after near-death experience has been around for some time. The
industrys stance for the past two years has been to deny responsibility for any wrongdoings,
downplay its role in precipitating the dozens of suicides, and claim that the AP governments
19

October 2010 legislation was a surprising and unjust crackdown on healthy practices. I have
claimed otherwise.
Yet, fairly surprisingly, my new paper investigating the causes of the crisis, and a recent
interview with SKS Microfinance senior managers come to some similar conclusions about the
causes. In particular, both versions see the unregulated hyper-competitive market as a significant
cause of the tragedy which led to microfinanciers troubles. How can this be?
Read the rest of this entry

Bordercrossing Books: The Journey of Indian MicroFinance by Ramesh S. Arunachalam

October 22, 2011 in Andhra Pradesh Microfinance Crisis, Book Review | Tags: andhra pradesh,
bordercrossing books, india, microcredit, Microfinance, ramesh s arunachalam | by philmader | 5
comments

Ramesh S. Arunachalam, 2011: The Journey of Indian Micro-Finance:

Lessons for the Future. Chennai: Aapti Publications.
The microfinance crisis in India which broke out in fall 2010, first imperiling numerous
borrowers and then an entire industry, is the most fundamental event in the world of
microfinance since the Nobel Peace Prize in 2006. In hindsight, it may even turn out to be the
defining moment of microfinance history never before has the dark side of microfinance, and
the vulnerability of the industry, been so brutally exposed to a global audience.
Naturally, these events have attracted a host of opinions and analyses ranging from simply
blaming the Andhra government for bringing down a healthy microfinance industry, to accusing
microfinance of having become worse than loan sharks. And yet, so far, we understand very little
of why Indias vast microfinance sector went so far astray. Thankfully, people like Ramesh S.
Arunachalam are out to change this.
Arunachalam has earned the respect of many a reader (me too) with his candid and incredibly
well-researched blogging on the Indian microfinance sector. He posts prolifically, but despite (or
perhaps because of) his over 20 years of work experience in development and rural finance, he
has otherwise kept a low profile. He is not an outspoken critic.

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Now Ramesh Arunachalam has applied his sharp analytical approach and evident knack for
writing to publishing the first book about the Indian microfinance crisis. The result is a
meticulous, evidence-based piece of research which brings clarity into what so far has mostly
been an interest-driven and polemical battle of explanations.
In some ways what Arunachalam has produced is, in fact, more than a book; it is a dossier of
evidence and analysis of how the Indian microfinance sector functions at the deepest levels, and
where its errors lie. It is a biography of an industry in identity crisis, and also a handbook on how
Indian microfinance might (perhaps) still be saved. Above all, as the books (wonderfully
illustrative) cover implies, it is a search for the Faustian, troubled soul of Indian microfinance.
Read the rest of this entry

Indian Microfinance: The Stalemate is becoming unstable

May 17, 2011 in Andhra Pradesh Microfinance Crisis | Tags: andhra pradesh, bailout, crisis,
india, microcredit, Microfinance, SKS | by philmader | 2 comments
Microfinance in India is still where it was months ago in a stalemate with the government. The
crisis of microcredit in the southern Indian state of Andhra Pradesh which began last October
with a rash of client suicides we were the first to blog about this, and followed its development
throughout climaxed in a standoff in late October between the state legislature and
microfinance institutions (MFIs). Mud was thrown by both sides in an intense blame-game,
while actually the crisis had systemic causes rooted in weak legislation and a hyper-competitive
market.
Neither side has found a way to break out. But the stalemate is becoming unstable. It is
increasingly clear to MFIs and their funders that most loans in Andhra Pradesh will not be
recoverable, since trust in the MFIs promise of being here to stay is dwindling, and the new
legislation has rendered erstwhile coercive recovery practices impossible. On the other hand, the
Andhra government cannot step down from its legislature issued under the promise of protecting
the poor without losing face, and the Indian federal government has chosen to largely ignore the
issue.
The Economic Times from Mumbai recently provided a thorough update on what happened in
the past few months, which Im quoting here. The growing problem is that the MFIs in Andhra
Pradesh will need new capital soon in order to replace the loans they have written off, or will
soon be forced to write off. Read the rest of this entry

The Why? of Andhra Pradesh An Interview with

Malcolm Harper
December 14, 2010 in Andhra Pradesh Microfinance Crisis, Microfinance | Tags: andhra
pradesh, crisis, india, malcolm harper, microcredit, Microfinance | by philmader | 4 comments

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In this interview, Professor Malcolm Harper analyses some of the underlying causes and
consequences of the microfinance crisis in Andhra Pradesh. Professor Harper is chairman of the
microfinance rating agency M-CRIL and editor of the volume Whats wrong with
Microfinance?. He has been Professor of Business Development at Cranfield Business School,
and as the former chairman of BASIX, significantly pioneered microfinance in India.
Professor Harper, you recently returned from India. How bad is the situation for the
microfinance sector there?

I was in Delhi at a very large meeting of microfinance people, where of course Andhra Pradesh
was being talked about a lot. I then spent some time in Orissa, in a village three kilometres from
the Andhra Pradesh border. I called in on the local office which previously I didnt even know
existed of BASIX. And the local staff said there had been no trace of any repayment
difficulties, even though the Andhra Pradesh border was so close by. This surprised me, and even
they were rather surprised. Repayments were at the normal high level.
But I was running a course nearby and my students were interviewing various traders in the local
market, and a few of them mentioned that one or two of the microfinance institutions, from
which they had taken loans, had stopped making disbursements. And that of course has the seeds
of trouble, because one reason why people repay is because theyre going to get another loan.
So it seems that the MFIs are having trouble refinancing themselves now, raising capital for
their lending activities.
Thats inevitable, I think, because when the banks are beginning to wonder about the quality of
their loans to the MFIs, theyre not about to release further loans. And that, of course, contributes
to the problem, because as I said people repay mainly because theyre going to get another
loan. Read the rest of this entry

And now this: GrameenLeaks??

December 5, 2010 in Andhra Pradesh Microfinance Crisis, Microfinance | Tags: Accounting,
andhra pradesh, Bangladesh, Grameen, india, microcredit, Microfinance, WikiLeaks | by
philmader | 2 comments
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In the past few weeks, Ive been silent here about the microfinance crisis events in India. But
why not let others do the talking? This blog published (what I think was) the first analysis of the
A.P. events right after the crackdown ordinance; following up with a two-piece search for the
underlying causes (1, 2). Most of the causes I speculated about at the time are pretty much
turning out to be true:

interest rates were far too high and have been rushed down

the sector was under-, or practically un-, regulated (especially, if Kaushik Basu says so)

the borrowers were/are overindebted (far more than the MFIs were aware of, I assume)

and the profit motive created perverse incentives for MFIs.

One prediction I wont make, though, is whether microfinance in India will pull through. That
depends on politics in Delhi (bailout or not?) as much as it does on the adaptiveness (not the
resilience, which means no change) of the sector. But I wouldnt bet my money on an MFI in
India at the moment, given the pessimism of Vijay Mahajan (If this situation continues, there
will be no microfinance sector in 2011.) or the SKS shareholders (shares down by 52 percent).
The real surprise story of the week, however, were WikiLeaks diplo-inslults.
Or really, were they? Only the Americans are really making a big deal out of the leaked
diplomatic cables. If anything, the now-public secret assesments of sundry politicians should
provide a few good-natured jokes at upcoming international summits. Would-be Israel-nukester
Ahmadinejad will hardly be insulted by being compared with Hitler, and German Chancellor
Angela Merkel and Foreign Minister Guido Westerwelle already had their share of laughs about
their leaks.
Read the rest of this entry

And now all of a sudden it turns out

November 5, 2010 in Andhra Pradesh Microfinance Crisis | Tags: andhra pradesh, economic
sociology, economics, interest rates, microcredit, Microfinance, regulation | by philmader | 7
comments
that lower interest rates were possible all along!
Indias embattled microfinance industry has agreed to cap interest rates on its loans in southern
Andhra Pradesh state at 24 per cent, as it seeks to counter an intense political backlash against
the sector.
Previously, the industry insisted its high interest rates were needed to cover the cost of outreach
to so many small borrowers. However, it has decided to cap the rates in a bid to reduce
23

antagonism from Indian policymakers, who are increasingly uncomfortable with the large profits
and personal fortunes being amassed in an industry ostensibly dedicated to alleviating poverty.
([Link])
And in The Hindu:
Weve made several concessions because were under duress and not because we want to. It is
against our model, but we want the sector to survive. Mr Gopalan completely understands our
situation, but he has not let us off the hook, said Mr Vijay Mahajan, President, MFIN.
Read the rest of this entry

The search for reasons & solutions: A compendium of voices

on the AP microfinance crisis
November 3, 2010 in Andhra Pradesh Microfinance Crisis | Tags: andhra pradesh, civil society,
crisis, media, microcredit, Microfinance, Milford Bateman, suicide | by philmader | 3 comments
As India celebrates Diwali this week, the debate about how to deal with microfinance has calmed
a bit. But since I wrote up my analysis of the root causes Andhra Pradesh showdown (part 1, part
2), the news has taken few further twists. Heres an update:

Vijay Mahajan, Chairman of BASIX and speaker for the MFIN industry organisation,
stated on TV: Alot of the reasons for invoking the ordinance were the creation of the
microfinance sector itself. There has been a certain degree of wrongdoing by our sector.
And as the president [of MFIN] I am the first one to accept it, I want to do it on record.

The interest rate disclosure requirement under the new microfinance ordinance in AP has
uncovered interest rates far higher than previously reported up to 60.5 percent. I wish I
was surprised; but MFIs usually neglect to factor compulsory savings, fees, etc., into their
publicly quoted rates.

The AP government has published the complete list of complaints of malpractice and
suicide launched against the MFIs see it here.

A massive borrower database in AP will go on-line in January, in an effort to clear up the

mess.

Meanwhile, Indias vibrant media and civil society have been grappling with the issue, as are
some American media. The rest of this post is a digest of the most provocative, insightful and
intelligent commentary Ive seen on the subject.
Read the rest of this entry

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Andhra Pradeshs Animal Farm: Debt traps, life insurance

and death bonuses
October 25, 2010 in Andhra Pradesh Microfinance Crisis, Financial Market Regulation | Tags:
andhra pradesh, Development, financial crisis, india, microcredit, Microfinance, suicide | by
philmader | 5 comments
This is the second half of my search for the causes of the microfinance crisis and suicide tragedy
in Andhra Pradesh. In my last posting, I outlined the macro causes as I saw them. I found
evidence that MFIs were charging borrowers interest rates over and above what they actually
could have charged them. I also found that the government failed to regulate despite an evident
lack of self-regulation; that is, until Andhra Pradesh clamped down two weeks ago. In this
posting I search for micro-level causes.
Since my last post, SKS on Saturday posted profits up by 116 percent y-o-y (read: more than
doubled), and also apparently held a secret board meeting over the weekend. You dont need to
be a Marxist to find a steep rise in profits disturbing for a bank which lost at least 17 of its clients
to debt-driven suicide in the same quarter. Yet the crisis in AP is far bigger than SKS, and the
five biggest MFIs have realised this and collectively announced last Friday to restructure
distressed loans. Finally. It took nearly two months of suicides, a heavy-handed regulatory
clampdown and a media backlash to drive enough sense into the MFIs. The womens Self-HelpGroup movement is also pushing for better regulation. How did we get here in the first place?
The poor are prone to debt traps
The media have caught onto some of the macro issues, but here I will identifiy drivers for the
heavy debt burdens and suicides which operate at the micro level. We must be aware that suicide
in India is already shockingly common among farmers. But many, if not most victims in AP were
small traders, not subsistence farmers, so were dealing with a new phenomenon here.
It is no surprise that highly-indebted microfinance borrowers can be driven into debt spirals
towards MFIs under conditions of heavy marketing, misinformation, social pressure to join selfhelp groups, and the vagaries of economic life at the bottom of the social order. If one thing goes
wrong (an illness, a crop loss), an apparently sensibly invested loan suddenly turns into an
insurmountable debt burden (see these media reports for illustrations of microfinance-funded
debt traps). In reality, India Shining is home to some of the poorest people in the world. As we
saw last week, some microfinanciers are apparently out of touch with this reality. Atul Takle of
SKS went on the record telling the Associated Press, I personally dont think a person would
take her life for 225 rupees ($5.08) a week. But four out of five people in India live on less than
20 Rupees a day (2007; latest figure I could find).
This (self-drafted, non-exhaustive) list outlines individual causes for the poor taking on
unsustainable debt. It shows that there are mulitple reasons for the poor falling into microfinance
debt traps, and that most are outside of their control. Read the rest of this entry

25

Milking the cow for what its worth: Regulatory failure and
perverse incentives in Andhra Pradesh
October 22, 2010 in Andhra Pradesh Microfinance Crisis, Microfinance | Tags: andhra pradesh,
finance, india, microcredit, Microfinance, regulation, suicide | by philmader | 9 comments
Maybe its too early to seek real explanations for the microfinance tragedy in AP. The dust hasnt
settled yet, but Im struggling to come to grips with the big why?. (For a summary of events
until Tuesday, see here.) My usual blog sources of all colours for all things development are
silent, so far. But the Indian media are buzzing with coverage and an occasional piece of
analysis. From what I can tell from these reports, the crisis was caused by a failure to regulate
and a set of ultra-perverse incentives for microfinanciers and their employees.
What happened? In the past 6 weeks or so, some 30 to 60 microcredit borrowers in Andhra
Pradesh (according to different sources) committed suicide over their loans. Individual stories
had surfaced increasingly throughout early and mid-October about borrowers suffering under
heavy debt burdens and massive pressure from agents; with measures apparently even including
child abduction as punishment for loan default and agents urging borrowers to take their lives to
reap credit life insurance. Protests ensued, and last week, the AP government issued an ordinance
imposing rules of conduct and compulsory registration on MFIs (microfinance institutions). A
consortium of MFIs (MFIN) claimed this had halted their business completely, and this week the
MFIs submitted a petition at the AP High Court asking to quash the governments ordinance.
This Indian news video concisely tells the horrific story.
The High Court today officially permitted MFIs to continue their business activities, while
upholding the terms of the ordinance that MFIs may not engage in coercive practices and must
proceed with registration. Meanwhile, employees of SKS Microfinance and Spandana have been
arrested for harassing borrowers. SKS shares have dropped by over one fifth, indicating that
investors are worried about profitability (rightly so). An Indian apex organisation has proposed
for all its members to cut interest rates more about that below. Read the rest of this entry

Microfinance employees pushing clients to commit suicide?

October 21, 2010 in Andhra Pradesh Microfinance Crisis | Tags: andhra pradesh, crisis, india,
microcredit, Microfinance, microinsurance, suicide | by philmader | 3 comments
This is more shocking news from Andhra Pradesh. Obligatory life insurance sold with
microfinance loans may be incentivising overindebted borrowers to commit suicide. Worse yet, it
appears that loan officers have been pushing debtors to commit suicide as a way out of debt.
Heres the gist of a Times of India article by Jinka Nagaraju published earler today:

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A government study has found that some MFI agents themselves are encouraging the debtors to
commit suicide so that their loans are repaid. This happens because the borrowers are covered by
insurance.
Till now, there have been at least 45 suicides reported in the state in the last one-and-a-half
months allegedly due to the coercive practices employed by the MFIs in recovering the loans.

27