Microfinance: Good or Bad

The problem with case studies is that they can powerfully portray certain things that are exceptions rather than being the general fact. That makes it important for any critic to study evidence that can be called “significant” in the statistical sense. Documentaries like the one on france24 (http://www.france24.com/en/20080404-bangladesh-burden-microcredit-caring-grameen-bank-mohammed-yunnus) may serve political constituencies, but are of little help as far as advancing facts is concerned.

The concept of lending involves taking money back which in itself may be construed as coercive. Let me explain - even if a lender charges no interest, she still has to collect the principal. She is likely to apply some pressure such as sending reminders that repayments have become due, making visits etc. If there was absolutely no pressure on borrowers to repay, I suspect a vast majority of them would be intelligent enough not to repay. A look at the performance of numerous development credit programs which did not have a system of adequate follow-up on disbursed loans will reveal that they could not be sustained and their outcomes were mixed at best.

Having said this, I believe information asymmetry and a lack of transparency in a capitalistic setting results in exploitation of poor clients. This happens even when the law of the land seeks to protect the poor.

Here is an example:

In the Indian context, there are strict restrictions on Non Banking Financial Companies (NBFC) taking savings from the public. Many NBFC-MFIs sought to get around this little problem by forming private trusts which were used to take members contributions. These contributions were then invested in the equity of the NBFC MFI. I wonder how many MFIs told their clients of the risks involved in such investments. I also wonder how many of them would share/have shared the upside that may translate on such investments?