Microfinance Comes Under FireVijay Govindarajan
Microfinance has come under fire in the past 18 months, triggered in part by SKS Microfinance’s IPO. Critics complain that the institutions supporting microfinance have become too greedy, and many are using this as an argument to deeply regulate or, even more, cut support to microfinance operations.
It’s worth taking a step back and remembering how this movement got started, and what it can accomplish. Dr. Muhammad Yunus introduced the concept of microfinance in 1983; in 2006, he won the Nobel Prize for his pioneering efforts. At its core, microlending is about poverty alleviation, about giving people at the bottom of the economic pyramid access to the financial system. It was always meant to be a “social innovation,” a way for corporations to make a profit at the same time that they do something good for society.
India recently introduced new regulations for microfinance operations. There’s nothing wrong with that, but it would be a shame if over-regulation choked funds going to the poor (which some analysts suggest may happen). The IPO, the new regulations, and a call for Dr. Yunus’s retirement from Grameen Bank have led some to doubt the whole notion of microfinance. A friend recently asked me: “Is the future of microfinance in question?”
I hope not. Consider this typical story, which is both heartbreaking and inspirational. In a recent trip to India, I met a woman named Padma who had benefited from the microfinance model. Padma comes from a small village with about 20 homes. She lost her parents when she was six. Padma never went to school. Her siblings arranged for her to marry at a young age—mostly to pass the responsibility for her on to someone else, a man who turns out to be chronically unemployed and doesn’t take care of his family. They have two children.
Imagine for a moment. You are living with two children in a small village. You are poor. Your siblings have washed their hands of you. You are illiterate. You do not have a job. Your husband is unemployed and does not support you.
It would be easy to give up. But Padma didn’t give up. Inspired when she happened to see Dr. Yunus describe the microfinance model on a TV show, she started a self-help group in her village, and took advantage of microlending to do it. Twenty years later, she is still involved, and she has put both of her children through college (her son is an engineer, her daughter is a teacher).
With a tiny loan, Padma transformed the lives of her two children. Such is the power of microfinance. And there are thousands of Padmas whose lives have been improved in the same way.
Padma was poor but she is also smart and entrepreneurial. Is it her fault that she is illiterate? Poverty is not caused by poor people; it is imposed on them. It is an institutional failure. When you deny access to education, finance, housing, and health care, the poor remain poor.
We can and should use innovation to create micro homes, micro finance, micro insurance, micro grids, and so on; all of these innovations can remove the one thing above all others that keeps the poor in a cycle of poverty: insecurity. And all of those innovations are opportunities for businesses. They’re about market creation: When the poor earn more income, they consume more products. They’re about talent creation: Padma has added two more people to India’s talent pool. And finally, they’re about social justice.
No bad practices should be tolerated—in microfinance or anywhere else. But the proper regulatory framework should easily allow microfinance institutions to make a fair profit, even while they lift up the poor. Let’s continue to use microenterprise as an instrument of economic and social change at the bottom of the pyramid.
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