No Longer Black and White

Microfinance - No Longer Black and White

Suniti is one of OneSeed’s amazing summer interns.  This is her third guest blog.

Suniti is an Economics concentrator at Harvard University. She has spent her summers working in a micro-finance organization in Northern India and researching the impact of Maoist Civil War on social and economic well-being of Nepali women. Her experiences have strengthened her passion for economic empowerment through enterprise development. Suniti is also working as the Director of Outreach and Partnership (Nepal) with Udhyami Nepali, a non-profit that helps Nepali social entrepreneurs get off the ground. She is a Nepali citizen.

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In my quest to explore the idealized view of micro-finance as a solution to get people out of poverty, I spent two months after my freshman year interning at a micro-finance group in Northern India. My internship afforded me an opportunity to be in direct contact with the clients and get a closer view of some of the challenges and strengths of both clients and micro-finance institutions. Today as I leverage upon those experiences to write this blog, I am both in awe at and frustrated with practices within micro-finance and speculations that circumvent the real issues.

Unscrutinized Past

First of all, our collective narrative of “absolute or nothing” has become a heavy burden for the industry. In the beginning when micro-finance was first gaining momentum in Bangladesh, we looked past the soft loans and aids given to Grameen Bank to facilitate its near perfect repayment rates. Micro-finance was seen as the cure to poverty and misery, which it clearly was not. Given the paucity of people taking a hard look at the efficacy of the industry, it was no surprise that the good times would not last forever.

Over-Scrutinized Present

Fast-forward to today, and the scene has changed. Today people are disqualifying the merits of micro-finance as an industry attributing to the difficulty poor farmers are having in repaying the loans. After cases of suicides in Andra Pradesh, investors began pulling off their funds from MFIs around the world. The government of Andra Pradesh made it much more difficult for MFIs to extract loans back and gave officials power to revoke MFI registration, putting existing MFIs into jeopardy. The honeymoon with micro-finance is over, and observers doubt the merits of the industry as a whole. Even reasonable research on the limited benefits of micro-finance is being (mis)used to make the point in vogue; micro-finance is a bust.

Truth is Gray

The truth, as some reasonable commentators have pointed out, is subtle. The defaults on MFIs happened because of a cycle where borrower’s bad habits were not scrutinized by the MFIs, who were busy maximizing short-term profits. Obviously, these defaults incurred as a result of multiple borrowing, using loans for consumption purposes rather than investment and lack of proper screening from the MFIs. Instead of finding how loans were utilized, loan officers were given incentives to recruit more clients. In the end, the 30 suicides in Andhra Pradesh were blamed by families and media on excessive pressure created by MFIs to repay micro loans. The under-scrutiny of yesteryear’s helped build up bad practices for a useful and yet imperfect industry that is now facing allegations that it does not deserve.

Budding Entrepreneurs?

One of the deemed strengths of micro-finance was that clients are expected to grow a successful business from hundred dollars. Without proper skills, mentorship, low capital, business networks, it is hard to see how people can develop often improperly thought out business ideas, borne solely out of a financial need, into successful businesses. Again however, the objections are indicative of significant problems, not death knells for micro-finance. While micro-credit is not enough to start a successful enterprise, randomized evaluations of micro-credit in India have shown that people who have started businesses find it easier to expand their small businesses. Micro-credit has also helped people build their credit profile, which they can later use to obtain loans from traditional financial institutions. While few clients end up reaping maximum benefits, the potential for helping small scale entrepreneurs is there, and has been realized in cases.

What About the Other Benefits?

The ascribed benefits of micro-finance do not stop at higher consumption and business investment. One of the non-economic benefits of micro-finance is to empower women in decision-making process in households through financial empowerment.  This is perfect in theory, but I have personally seen how it can get undermined in practice. In many cases, the clients need to obtain signatures from their husbands to get the loans approved. To add to this, there are cases where non-married women cannot obtain loans from MFIs. These practices undermine the fundamental push towards decreasing male domination in financial decision-making in a patriarchal society.

What Should Be Done?

All of these issues suggest a clear problem. Well-run and well-scrutinized micro-finance initiatives can bring many of the advantages that made the sector such a darling of the world in the past. Time has however come for MFIs to modify their practices and create loan packages tailored to the different geographical locations, cultures and supplement them with skill sets and networks. A good example is MicroHome Solutions, Delhi. This is a social initiative that not just lends money to build houses to under privileged population, but also provide technical design assistance to build cost effective sustainable houses. On a different but important note, micro-finance should include more micro-savings and micro-insurance, rather than just micro-credit.  Many problems in rural communities is one of a lack of access to savings channels, and low investment due to return variability, problems that can be solved by micro-savings and micro-insurance much better than by micro-credit itself.

What Does it Mean for Us?

Given these realities, we believe that the potential of micro-finance in helping local communities build small businesses and raise female empowerment is still strong, when the MFIs are not over-extended and are focused on their real goals. We also believe that a responsible funding source needs to continuously monitor how its money is getting spent. OneSeed firstly believes that our partner on the ground has the right motivation and strategies. BPW Nepal is run by women, and hence is focused strongly on female empowerment. It provides its clients with financial literacy classes before the funds are distributed, hence lower risk of defaults. It has 315 groups and 1575 clients, and has maintained close to 100% repayment rate without overextending its size. With strong monitoring and support, we believe our partnership with BPW Nepal can blossom into an inspirational micro-finance story.