For Microfinance Institutions, a Return to Basic Principles is Needed

Two months ago, a Norwegian television station aired a documentary accusing the Grameen Bank, a world leader in microcredit, of misusing international aid dollars from the Norwegian aid agency Norad. An internal Norad investigationcleared Grameen of any wrongdoing, but the damage was done. Criticism of Grameen – and microcredit in general – shot to the presses. Prominent news outlets such as the New York Times published articles highlighting abuses in which loan sharks prey on vulnerable, impoverished clients.

Unfortunately much of the media is guilty of treating all microfinance institutions (MFIs) as homogenous units doing more harm than good. This tendency to generalize is unfair, unproductive, and damaging to reputable lenders. There is no question that certain lenders are providing bad loans to vulnerable borrowers, and these abuses must be stopped. But not all institutions are the same, and some are doing fantastic work.

The premise of microcredit is simple: poor people need access to credit to improve their lives. The foundation of strong economies is capital-driven markets, but about 2.7 billion people on earth do not have access to such capital, according to World Bank statistics. Providing banking services to this underserved sector of the world economy is the transformative idea that won Mohammed Yunus and his Grameen Bank a Nobel Peace Prize in 2006.

To be successful, microcredit needs to return to its roots. The Grameen Bank, which started the microcredit trend in 1976, revolutionized development with a carefully-crafted, methodological approach to lending. Years of academic research and first-hand experience created a system with a strong foundation for long-term, sustainable development: a focus on women and families; close-knit relationships between lenders and borrowers; mandatory and re-occurring training; and a corporate culture that emphasized community development.

Moreover, microcredit was never designed to be purely profit-driven. MFIs are adherents to the social enterprise model that seeks a balance between philanthropy and traditional business practice. As MFIs move away from the social end of the spectrum and toward bigger profits, the framework of a successful microcredit system breaks down. For example, Indian bank SKS Microfinance recently closed out a $347 million IPO while many Indian borrowers are defaulting on their loans. MFIs must work hard to restore a balance.

Better policy, government regulation, and corporate responsibility would help. MFIs and their stakeholders need to do a better job of creating strong, viable growth focused on long-term success. To do this, MFIs would do well to take a step back and remember where they came from.  A failure here could lead to even more damaging negative press, and most importantly, further alienate millions of worthy participants from an expanding global economy.

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