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Microfinance should not be micromanaged Add to ...

Microfinance - offering tiny loans to very poor people - has become a victim of its own success. Since taking centre stage in 2006, when the economist Muhammad Yunus won the Nobel Peace Prize for his role in founding the Grameen Bank in Bangladesh, it has expanded to more than 100 countries, and attracted the attention of global banking players.

Critics of microfinance who oppose its commercialization fail to see that this unique lending tool can be both socially beneficial - and profitable.

The Indian government has wrongly turned against the microfinance sector, which saw one of its biggest companies, SKS Microfinance, go public earlier this year.

In the southern state of Andhra Pradesh, the government has accused microfinance lenders of charging excessively high interest rates, and using coercive debt collection tactics. The sector is even being blamed for a rash of suicides.

The state government's move to reform the industry and limit interest rates has triggered a virtual collapse in collections and a liquidity crisis. Repayment rates used to be as high as 98 per cent. On Friday, the industry had to seek $222-million in emergency funds to keep micro-lenders solvent.

The industry has grown from a non-profit movement to a for-profit business model. It needs to charge high interest rates because of the high cost of collecting payments on millions of tiny loans. If the industry needs regulating, it must be done more intelligently. The Indian government, for example, could allow microfinance institutions to take deposits.

Microfinance can be both financially sustainable and an effective anti-poverty tool, says Nigel Biggar of the Grameen Foundation in Washington. A special poverty index, which measures such household details as flooring and roofing material, shows that microfinance serves the very poorest of the poor. Often borrowers are illiterate, have no credit history and live in villages with no roads or infrastructure. Regular banks will never cater to them. But microfinance companies, including commercial ones, will. By tracking poverty alleviation, they can deflect criticism that they are only guided by the profit motive - and improve their businesses. Governments should not interfere with this winning formula.

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