Micro-financing: The Gains and the Resistance

The Economist has an excellent article on micro-financing. The problem so far has been that interest rates are generally too high for the poor people to afford them. Plus, most banks are really not interested in going into the rural areas for investment because (a) the volumes are too low, and (b) the judicial and monitoring systems are too lame to keep track of loans given to villagers. However, financing the poor is very important because otherwise corrupt money lenders and pawn shopkeepers get a free hand with exploitation, and sometimes the interest rates amount to over 40% with all the bribery that goes on.

However, as The Economist puts it, in recent years, at least in some parts of the world, this bleak picture has begun to change, first in credit, then in savings and more recently in remittances. Grameen Bank and ACCION International pioneered the micro-credit concept, where they gave loans to extremely poor people and made the group members monitor each other to ensure repayment of loans and compensate for the lack of any collaterals. People who payed back were allowed to borrom more. Both the organizations are not-for-profit, but they manage to make profits all the same which they rechannel into other development projects. The idea of starting with credit instead of saving was a great one because apparently, the poor did not believe in savings. However, once the credit concept grew popular, even savings has picked up with BRI in Indonesia. Now, even the bigger banks are venturing into rural markets with more and more financing options.

The sceptism is still there though, because most of the micro-financing banks are not-for-profit and the initial capital comes from philanthrophists and governments, which do not have to paid back. Therefore, large defaults may go unreported if the auditing is not very strict. The very low loss rates of 1 to 3% achieved by these banks may not really be true. But all the same, it is great to have come so far!

Micro-financing cannot alone change the world. It needs support from the government and society alike. For example, a Kenyan microfinance bank closed down when the government stopped cleaning the towns and rebuilding the roads, because a poor infrastructure ruined the small businesses started by people and they were not able to pay back the loans. And even more disgusting has been the attitude of Maoists in Nepal, Islamic fundamentalists in Bangladesh, and drug lords in Afghanistan, who do not like the system because it gives too much liberty to the people and empowers the women.