Since the onset of the debt crisis in the Indian state of Andhra Pradesh during the last quarter of 2010, in which borrowers stopped making payments on their loans to microfinance institutions (MFIs), microfinance has come under intense scrutiny. Arguments for and against microfinance have gained more notice around the question of whether the poor really benefit from borrowing. Recent articles in New York’s Forbes Magazine and The Daily Star, a Bangladeshi newspaper, highlight opposing sides of this argument.
Proponents of microfinance (in this case, Habibur Rahman of The Daily Star) argue that microfinance eliminates discrimination by giving the poor access to financial services that they were previously denied. It is argued that the collateral-free loans disbursed to poor people allow them to engage in income-generating activities that can release them from the cycle of poverty. Skeptics of microfinance dispute this by saying that the loans, in reality, are not free from collateral because MFIs including nongovernmental organizations (NGOs) sometimes engage in aggressive loan recovery practices that include taking control of borrowers’ assets and applying peer-group pressure that appear to have led to some of the suicides seen in India. Furthermore, as donors favor investments in microfinance over health and education, NGOs may be pressured to use microfinance as a development tool.
While Mr Rahman claims that microfinance has led to a decrease in the population of Bangladesh living below the poverty line from 80 percent in the early 1980s to 40 percent in 2010 and that the number of children going to school has increased from 50 percent to 90 percent during this time period, Jude Fernando from Forbes argues that it is the NGO that ultimately gains. Most enterprises supported by microfinance are unsustainable, he argues, and losses from defaulted loans are often covered by donated funds.
A popular argument in support of microfinance is that it empowers women by giving them independence and the ability to support their households financially. Opponents dispute this, arguing that microfinance does not actually help women and that it “takes advantage of the inherent inequality of gender roles to apply peer-group pressure” to increase repayment rates. By this, they mean that MFIs target women because women will sacrifice more to pay back their loans so as not to bring shame to their families. This, they argue, worsens rather than improves their situation.
Finally, while supporters of microfinance insist that the high interest rates are necessary to cover the costs of the small loans made to the poor, since small loans are more expensive per dollar lent, and that the rates are still lower than those of moneylenders, those against microfinance assert that it does not take moneylenders out of the picture. They claim that since moneylenders often extend payment periods and accept payment in kind, borrowers supplement loans from NGOs with loans from moneylenders.
By Julie Moksim, Research Associate
Sources:
Forbes: “The Myths Behind Microfinance” by Jude Fernando, December 9, 2010, http://www.forbes.com/2010/12/09/microfinance-myths-muhummad-yunus-entrepreneurs-finance-jude-fernando.html
The Daily Star: “Microcredit Under Undue Questioning”, by Habibur Rahman, December 30, 2010, http://www.thedailystar.net/newDesign/news-details.php?nid=167975
Similar Posts:
- MICROCAPITAL BRIEF: FINCA Microfinance Jordan, JOHUD Partner to Fund Community Businesses
- MICROFINANCE PAPER WRAP-UP: “Land Titling and Microcredit in Cambodia: Examining the Reality of Hernando de Soto’s ‘Three Steps to Heaven,’” by Milford Bateman
- MICROCAPITAL BRIEF: Oxus Kyrgyzstan Borrowing $1.6m from Grameen Credit Agricole Foundation for Microfinance Lending
- MICROCAPITAL BRIEF: Grameen Crédit Agricole Foundation Loans $3.2m to Faten for Microfinance in Palestine
- MICROCAPITAL BRIEF: Opportunity International, UPS Foundation Announce “Unstoppable Women Initiative” to Expand Financial Services in Colombia, India, Indonesia, Nigeria
