Microfinance and financial inclusion

Attacks on the industry are unfair and counterproductive

Microfinance has come under attack in south Asia. Politicians have lined up to attack the industry – whose practitioners make small loans, generally to impecunious rural borrowers – as a racket that preys on poor people.

It is not above criticism. But these attacks are unfair and threaten to discredit an industry that is, for all its faults, a global engine of financial inclusion. A crackdown would not help anyone, except perhaps traditional moneylenders and feudal landlords.

The attacks have come in two waves. They started in the Indian state of Andhra Pradesh when local politicians blamed a spate of suicides on harassment by microfinance debt collectors. More recently, Sheikh Hasina Wajed,Bangladesh’s prime minister, has railed against Mohammed Yunus, the founder of microfinance, and accused the industry of “sucking the blood” of poor people.

Microfinance has come a long way from the non-profit organisations championed by Mr Yunus in the 1970s. The Andhra Pradesh crackdown followed an initial public offering of Hyderabad-based SKS Microfinance, which raised $350m. With nearly 100m borrowers worldwide and a loan portfolio of $65bn, the industry has become too big to ignore.

Proponents claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion. Loans, whether from microfinance institutions or traditional money lenders, smooth income, helping to cope with illness or other temporary shocks. Microfinance’s advantages over traditional sources are that loans are cheaper and free of the social conditions attaching to credit in feudal relationships.

Unsurprisingly, microfinance’s rapid growth has unsettled politicians. The attacks on Mr Yunus stem partly from events a few years ago when he considered entering politics. As to the charge of gouging, microlenders have small margins in spite of their high interest rates.

Growth should force change. Evidence suggests the Indian suicides were the result of borrowers taking on too much debt from multiple sources. Credit practices must be improved to prevent this. Lenders should disclose interest rates to stimulate competition. This requires intelligent regulation.

Microfinance brings a crucial service to poor people. Rather than being attacked, it should be helped to do an even better job of assisting them to assert their financial autonomy.

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