UpFront/Special | Feb 14, 2012 | 5786 views
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Feb 15, 2012
I am glad that the author has been able to provide some empirical observations on how micro finance works or actually doesn't work. The fact of the matter is, without repayment discipline no lending programme can work. To foster repayment discipline peer group or cohort pressure, implemented throu group or circular guarantees is the solution. In order for that to happen the borrowers should all come from the same small compact group - say a small village or a group within a village - and all should borrow and borrow about the same amount. Else the incentives to repay get skewed and repayments will not happen. Here is where the problem arises: is everyone in a village entrepreneurial enough to run some business? Can the immediate community support all the services they can produce? In one example an MFI financed women to buy and keep goats. How many goats can a village sustain? If everyone has a goat or everyone became a vegetable seller then how does the business work successfully? Clearly the answer is that everyone cannot become an entrepreneur and therefore, by winding the Rgument backward, MFI on a large scale cannot succeed except a a means of providing consumption finance. The problem with the latter is repayments. Consumption finance leaves the pore in deeper debt then they were in to begin with.
Then there is the aspect of the cost f finance - the rates of interest charged are usurious and unaffordable while admittedly less than what a local loan shark charges. Charging lower interest is not feasible given the administrative costs, especially those of collection and we have seen that without the collection discipline the model cannot work. On top it given the profile of the target clients, this is asensitive segment of the society and politics is ever ready to barge int unannounced for the detriment of everyone concerned. Which is what happened in Andhra.
Unfortunately private capital saw one more opportunity to make money out of a nascent idea without waiting to delve deeper and ask uncomfortable questions. They poured the money in, built up sme MFIs made IPOs and walked away with a lot of money. The entire MFI model stands discredited.
The more sustainable model is one of saving. There have been some wrk done, at IFMR I believe that holds that micro savings is a better option than micro finance as we know it. One can even operate micro insurance programmes on a mutualised basis with actuarial support etc being provided gratis by an outside agency.
It is time to critically re-examine the micro finance model and keep private capital out of it if it is to work for the poor.
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