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Year in Review: Microfinance Experiences Growing Pains

December 30, 2010

Microfinance-women It was a year characterized by change, and controversy, in the world of microfinance.

In January, microfinance institutions (MFIs) were put to the test when a 7.0-magnitude earthquake struck Haiti, leaving millions of people homeless and countless livelihoods shattered. In a country where, pre-earthquake, 80 percent of residents lived on less than $2 a day, MFIs have always been important as "banks to the poor," and have always faced challenges. After the quake, however, they provided an indispensable lifeline to millions of people trying to rebuild their lives and businesses, even as the financial health of many became as precarious as that of the customers they serve.

Indeed, in the year since the quake, the share of microcredit clients in Haiti who have defaulted or are at risk of defaulting has more than doubled, to 18 percent (compared with the international rate of almost 3 percent), while fully a quarter of the $38 million in microcredit loans outstanding could end up in default. And with only a third of the $6 billion pledged for reconstruction efforts at a United Nations donors conference in March having been committed to specific projects, coupled with fresh travails like the recent cholera outbreak and post-election violence, MFIs in Haiti will continue to be challenged.

Elsewhere, MFIs experimented with new approaches, often funded by foundation and corporate dollars. In January, the Bill & Melinda Gates Foundation awarded a total of $38 million to eighteen MFIs to make savings accounts available to the rural poor in Africa, Asia, and Latin America, while in February the Grameen Foundation announced a three-year, $3 million grant from the JPMorgan Chase Foundation to expand its program to increase microfinance volunteerism among senior working professionals.

That same month, Global Partnerships, which provides capital and expertise to "social enterprise" MFIs, announced that it had launched a modest expansion into Mexico, where lack of competition had kept microfinance interest rates high, while Grameen announced an effort to better target poor clients in Mali and Senegal.

By mid-year, however, many longtime proponents of microfinance had begun to lament the growing commercialization of the field, as a number of for-profit banks began to take advantage of market discontinuities to charge exorbitant interest rates and impose steep fees on clients. Grameen Bank founder Muhammad Yunus, widely credited with developing the microcredit concept, even argued that microcredit interest rates should be no more than 15 percent above the cost of capital — a "test" that 75 percent of MFIs worldwide would fail, according to data from the Microfinance Information Exchange.

The profits-versus-altruism debate heated up over the summer, when one of the world's largest microlenders, India-based SKS Microfinance, went public, raising $358 million. Eyebrows were raised when it was revealed that the company's founder, Vikram Akula, and other investors, including a number of prominent Silicon Valley venture capitalists, stood to profit handsomely from the IPO. Also embroiled in the controversy was Seattle-based Unitus, an international nonprofit that works to accelerate the growth of microfinance. In July, the organization, whose stake in SKS was worth millions after the IPO, shocked the nonprofit community when it announced it was laying off its forty-person staff and exiting the microfinance field. The announcement led many to question the motives of the organization's board members, at least four of whom had invested personally in SKS and stood to realize sizable profits from its going public.

By the end of the year, reports started to emerge that Indian microfinance institutions were facing many of the same difficulties as struggling MFIs in Haiti. Indeed, in November it was reported that almost all borrowers in Andhra Pradesh, one of the country's largest states, had stopped repaying their loans — egged on by local politicians who accused the microcredit industry in India of profiting on the backs of the poor. The SKS public offering and for-profit MFIs charging sky-high interest rates helped fuel public outrage, and by year's end legislators had passed a law that restricts how companies can lend and collect money.

"We created microcredit to fight the loan sharks; we didn't create microcredit to encourage new loan sharks," Yunus told a group of financial officials at the United Nations back in the spring. "Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people."

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We just posted on this as well. The following article from the BBC about poor farmers and other borrowers in India committing suicide because they couldn't repay their loans is really sad too:

http://www.bbc.co.uk/news/world-south-asia-11997571

Thanks for the comment and link, Archana. Don't think it's an exaggeration to say that what is happening around microfinance in India is a tragic situation.

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