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Microfinance: Little Loans; Big Trouble
The Globe and Mail has an article called Microfinance: Little Loans; Big Trouble that has an interesting take in microfinance. You can read the whole thing by going here: http://www.theglobeandmail.com/news/world/microfinance-little-loans... but I have included the conclusion of the article below and am interested to know what you all think.
India isn't the only country where microcustomers have become overextended. Indebtedness has also been a problem in Bosnia, Nicaragua and Morocco, says Elisabeth Rhyne, managing director at the Centre for Financial Inclusion at the global microfinance non-profit ACCION.
Until lately, the sector has been all about growth, a goal made easier by a global economic boom. Now that some markets are getting saturated, the focus must shift to “putting the brakes on the industry … to look more at quality of what you're giving than just expanding the numbers,” she says.
A number of measures may mend the situation in India: the start of credit bureaus, more transparency, closer co-operation between the government and the private sector, and a stronger ethical and regulatory framework. Some, like Ms. Rhyne, are spearheading efforts to create a global set of principles on how to treat microfinance clients.
It's tempting to compare Andhra Pradesh with closer-to-home payday lending, or the U.S. sub-prime crisis. Lending money to lower-income and sometimes less-educated clients attracts big investor money. Borrowing costs rise, and debtors get in over their heads. Some companies sink. In the end, the poor suffer the most.
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Replies to This Discussion
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Permalink Reply by Sasidhar Thumuluri on -
Hi Tom,
This is an interesting read and agree that credit bureau, transparency and client education are paramount. However I am not sure of it is fair to draw parallels between sub-prime and on-going crisis in AP. While is it true that there has been recklessness and greed among some MFIs, the situation really would not have turned into a crisis if the government reacted differently. This is more of a state created trouble rather than credit bubble in real sense. This open letter by a well wisher in WSJ makes this point loud and clear.
http://blogs.wsj.com/indiarealtime/2010/11/15/india-journal-microfi...
The key difference between sub-prime and AP is in this statement:
"The first number to look at is default rates. Up until a month ago, at the biggest lenders, less than 2% of borrowers in the state were missing payments on their microloans. The payment crisis, where people abandoned their repayment schedules, happened only after you told borrowers they didn’t have to pay. If this borrowers’ rebellion was triggered by dirty lenders, one would imagine the default rate would have expanded gradually before tipping into crisis."
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Permalink Reply by Tom Murphy on -
Thanks for your comment Sasidhar. I agree with you on the comparison to sub-prime. I think there is a want to be a bit sensational and also reaching to try to make a comparison to something at home.
Thanks for pointing out the WSJ piece.
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Permalink Reply by Natwijuka Colin Bwempazi on -
Thanks Tom for the website and information, but still as you open on my discussion they website has sent another good example of a miilioneer who started with $200, therefore small loans can be great on the other side of the coin.
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Permalink Reply by Tom Murphy on
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Natwijuka,
That is still anecdotal as it is one example. So, yes, the other side of the coin is that microfinance is dynamic and can lead to unimaginable growth. That is a great thing. However, there are the people who fall into a payback loop and dig a deeper hole through loans and defaults. So, I do not at all want to suggest that microfinance is bad, but to point out that it is far from perfect. We need to recognize that microfinance can be transformational in both positive and negative ways and because of this, tailor programs that can put individuals in the best position possible to flourish.
The article I attached is truly sensational in the way it connects the current problems with SKS to the Sub-Prime crisis in the United States. What is concerning is the fact that SKS has been left vulnerable as people have defaulted at a higher rate.
Translation
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