SKS, India’s largest microfinance bank, raised cash last year by selling shares at 95 times their initial value. And now comes an increased chorus from politicians in Andhra Pradesh about fraud, corruption and impoverishment linked to SKS — quite a bell to un-ring.
Microfinance clients do often borrow at interest rates greater than 100% given the extraordinarily high cost of capital to service such small contracts given the absence of consumer credit infrastructure, such as a credit bureau.
It’s not news that microfinance loans are risky and thus carry high rates, nor is it news that former NGO-funded microfinance institutions (MFIs), have made a profit by going public. MFIs in Latin America and Asia have been down this path with great scrutiny for years. A leading opponent of for-profit microfinance lending is none other that one of model’s founders, Dr. Muhammad Yunus.
Suddenly, the political winds blowing across developing economies have turned on microfinance as an anti-poverty tool. Not only are politicians in India claiming microfinance is a tool of usury, but here comes Nicaragua, Bolivia and Pakistan joining the fray.
And today comes the stunning news that a corruption investigation has been ordered by Bangladesh government against the Grameen Bank. Dr. Yunus, the Nobel Prize winner and one time darling of international development, has been ordered to face a court on charges of defamation.
Can the media kindly take a breath and stop the madness? Why is the action of a few bad apples in India (and beyond) summarily condemning the integrity of Muhammad Yunus and the microfinance industry?
Simply put, microfinance — namely the joint liability contract where peer groups act as repay monitors in the absence of credit history — has been a powerful innovation in Bangladesh and beyond. But the joint liability contract pioneered and scaled by the Grameen Bank is not impervious to the common blips that occur along the normal path of business.
Furthermore, microfinance proponents have never claimed the model was a silver bullet for development, nor do leading advocacy groups like the DC-based Grameen Foundation claim that over indebtedness is not a concern.
Indeed, these actors fund research that looks into how the simulation of more robust regulation can mitigate borrowers just taking out new loans to pay the old ones.
Microfinance is banking for poor people. With some differences, poor banking customers can often behave like less poor banking customers; repay at uneven intervals based on legitimate and not so legitimate variables.
If the burgeoning anti-microfinance movement needs a job to do, why doesn’t it consider the systemic failures (e.g., the absence of state-sponsored credit tracking) that have led to poor borrowers falling underwater?
As we’ve seen in the US, a functioning lending market requires robust regulation and public/private partnership.
End the witch hunt on microfinance the model and start the push to regulate against predatory lending in all forms.
Image credit by Yodel Anecdotal via Flickr under a CC license