The deteriorating situation surrounding SKS Microfinance in India has offered a grim picture of what many believe to be the future of microfinance. Microfinance still remains a valuable tool in combating poverty and we should not be so quick to write it off.
Living in Bangladesh, I recently had the pleasure of meeting with Grameen Bank borrowers and seeing microfinance in action. As a result of bank loans, women who could not read or write their own names are sending their children to universities. Families that were living in one-room mud huts and sleeping on the floor now have multi-room houses with beds, mosquito nets, hygienic toilets, and access to clean water. These are all official indicators that someone has crossed the poverty line as a result of microfinance.
Microfinance is not just working in Bangladesh, but all over the world. In Kenya, Jamii Bora is working to combat poverty with a program that emphasizes microsavings in addition to microlending. In a recent New York Times article, Nick Kristof tells the story of Jane, a 38 year-old single mom and former prostitute. Thanks to Jamii Bora’s microfinance program, she now is trained to sew, has been able to move out of the slums into a house in the suburbs, and has provided an education for her three children.
Despite these incredible stories, microfinance and microfinance institutions have recently been met with fierce opposition. In Bangladesh, Prime Minster Sheikh Hasina, a former proponent of microfinance, has opened an investigation into Grameen Bank and its founder Muhummad Yunus. India has enacted laws that severely restrict lending, and Pakistan and several Latin American countries are discouraging borrowers from repaying their loans.
There are two main criticisms of microfinance. One is that borrowers are not spending their loans for the purposes they are intended. Instead, they are purchasing personal goods and are therefore defaulting on their loans. The other, which Yunus describes, is that banks are trying to become too profitable, and have made their interest rates unbearable for their borrowers. The banks are then going under because borrowers cannot repay at these high interest rates or do not want to repay because they feel they are being ripped off. In either case, the banks are at fault. In the first scenario, they are not monitoring spending or encouraging savings, and therefore are taking serious risks in lending to its borrowers. In the latter scenario, the banks’ switch from non-profit to for-profit has created a culture that is detrimental to borrowers.
None of this means that microfinance is bad or that microfinance does not work – it just means the system needs to be perfected. Microfinance already has very high interest rates by banking standards, but there needs to be more regulation so that microlenders cannot charge exorbitant rates in order to boost their own profits. There also needs to be an effort to choose those who will truly benefit from microfinance and monitor their progress directly. Both Grameen Bank and Jamii Bora require savings accounts, something that would probably help reduce loans being spent on personal needs and not on entrepreneurial efforts.
Microfinance is still a work in progress and each country faces unique challenges in combating poverty. But after seeing first-hand the differences that microloans have made to the lives of women in Bangladesh, we cannot give up on microfinance.
Photo Credit: Alexandra Zimmerman