Microfinance – Good, Bad and Ugly

Microfinance is a one of those ideas which has been around for a long time but people have shown a lot of interest in it only recently (trend link). Now a days most people understand what it is and usually have  lot of positive things to say about it. But like any other idea, it has those 3 sides – good, bad and ugly. I stumbled up on the last 2 only in the past few weeks. After reading Yunus‘s book – it was very inspiring to learn about Microfinance and how it is going to pull a lot of people out of poverty. I was a very firm believer in that. But I think the reality is far different than what we find in books.

Banker to the Poor

The other 2 books in context are – “A fistful of rice” by Vikram Akula and “Confessions of a Microfinance heretic” by Hugh Sinclair.

A Fistful of RiceConfessions of a Microfinance Heretic

Vikram Akula was a poster child of Microfinance – couple of years back, in 2007 when I learned about him – I was so inspired and I had dreams of going back to India and working for SKS Microfinance. I sent emails to SKS Microfinance about it but never heard back. The technology stack was all .NET so I couldn’t find a way to work for them. Later in 2008 I attended a talk by Vikram Akula at University of Chicago and was completely inspired. As I read his book – which showcases all the troubles he faced to start his firm – it stuck me how he was forgetting the basic tenets of Microfinance. He has been working in it for almost 10 years and was dreaming up to connect Microfinance with capitalistic market based profit making companies. His idea is cool on paper, but the implementation is wrong.

When you get to poor people who are way below the poverty line and you offer them these micro-loans – the core idea should be helping them. Just helping them. Not even thinking in terms of “Oh, I am here to rescue you out of your poverty-ness”. No. Just helping them and showcasing them certain best practices is what one can do. There is no way one person, one system can massively move people out of poverty. If you think a little deeper – the systems which we have in place are enablers of this poverty and poor people. Nothing within the system can really fix it. But if we go around trying to do so – it would be a failure.

Which is exactly what happened to Vikram Akula’s SKS Microfinance. Even though Yunus never liked linking Microfinance with for profit making companies – he couldn’t stop Akula. And in 2010 – SKS collapsed. When a lot of poor people who borrowed money and couldn’t pay back – started committing suicides – the AP Govt passed a law to ban all microfinance activity in the state, thereby bringing down SKS. When you bring in investors who are looking for returns there is going to be a pressure on the company to churn profits always. This in turn will put pressure on the micro lenders to perform better which is passed on to the poor people who are already struggling to survive.

Hugh Sinclair explains it much better in his book. He worked in various microfinance firms for about 10+ years and saw how the reality mismatches with the fantasy story that everyone is weaving around him. Poor people are struggling but they are also human. They have desires as well – the money they started to borrow – got used for one time entertainment values rather than use it as an investment. If you are poor and hungry, a entertainment is far more distracting than a entrepreneurial thought. They do want to get better but after their basic needs are met. So any money thrown at them will first go towards their basic needs and then to uplift yourself.  Maslow talked about this so long ago. Sinclair also talks about how big banks have gotten into microfinance which is a $70 billion market and trying to make hay day out of it. In all this Grameen Bank (not Grameen Foundation – checkout the comment by Hugh below!) is an exception. It also functions as a bank, because of some laws passed in Bangladesh and may be that is the way to go. A Microfinance company can become a bank after certain time or reaching targets and then start thinking of profits- rather the other way around where the big banks get in with sole motive of making profits on the back of struggling poor.

My next book I am planning to read is – Fortune at the Bottom of the Pyramid – which Akula says was his inspiration to try to make a profitable public company on top of idealistic mico lending company.

Fortune at the Bottom of the Pyramid

One thought on “Microfinance – Good, Bad and Ugly

  1. Just to clarify, I do not suggest Grameen Foundation is a credible institution at any point in the book. I highlight their sloppy due diligence; their unwillingness to disclose the interest rates their MFIs are charging; how they invested in a knowingly illegal institution that was discredited across the entire sector; that this same institution suffered chronic client desertion and charged the poor over 100% per year; it occasionally stole client savings (according to the rating reports); and was the first microfinance institution I know of to have it’s rating withdrawn for providing false data to the rating agency; and yet Grameen Foundation defended the institution even while other investors withdrew. They even persuaded, with guarantees, that Standard Chartered and Citibank invest in the same institution. They did this while Yunus was lecturing the world about the evils of for-profit, high-interest microfinance.

    But here lies the confusion. Grameen Foundation is not Grameen Bank. It is a US-based NGO based in Washington that Yunus has almost zero control over, despite sitting on their board. Privately one would imagine Yunus is furious with the activities of this rogue institution in his name – likely there is not a lot he can do about that either. Yunus himself criticised Nigerian MFIs for charging such high interest rates, but never came out and criticised Grameen Foundation for supporting them, presumably in order to avoid a scandal in the US.

    Grameen Bank charges comparatively reasonable interest rates, of the order of 25%. Grameen Foundation find rates of 125% to be acceptable.

    Also, when Heinemann’s documentary criticising Grameen Bank was released, it was Grameen Foundation and their ilk in the US that launched the feeble smear campaign, which naturally back-fired.

    So, while I think there are flaws with Grameen Bank, please never confuse it with the substantially inferior Grameen Foundation. And do note the irony that the CEO of Grameen Foundation is now part of the so-called self-regulatory effort to clean up the image of the sector – Truelift (no, that’s not a botox product). The wolves are guarding the sheep.

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