Dec 29, 2009

Microfinance is a national shame

My article on the loot being perpetuated by Microfinance institutions (MFIs) evoked a lot of response. You have probably seen the spate of comments on my blog. If not, here is the link:

The article was also reproduced on various sites. Interestingly, wherever it was posted, it brought in strong reactions from people who were caught unaware about the high rate of interest being charged by the MFIs. On a site
a write-up appeared on Nov 27 2009 under the head: Devinder Sharma's negative assessment of microfinance institutions.

The article said: Recently in an article on his blog Ground Reality he has penned what seems to be a scathing criticism of the microfinance sector as a whole.

Devinder’s assessment is the latest in a long list of negative articles that have appeared on the microfinance sector in India.Considering that SKS Microfinance intends to list within the next 4 month one can only expect these voices to get shriller and louder.

As another blogger has rightly noted that SKS Microfinance is on its way to become India’s Compartamos and it has even appointed the same bank (Credit Suisse) that was the underwriter for the Compartamos issue to manage it’s IPO. Once SKS Microfinance lists and it’s balance sheet and margins become public knowledge it would be reasonable to expect all hell to break lose, atleast from the leftist brigade in India.

Below this, it reproduced my article from the blog. I think the website was expecting people to express their anger at what I wrote. Instead, the letters were supportive of what I had raised. You can read the entire piece (along with the comments if you scroll down) at

I also draw your attention to another important report (also published on the same website, which needs to be appreciated). The website reproduces a report from Boston Globe. It is published under the head: Microfinance dosn't work, claims Boston Globe (read the report at
I also draw your attention to another report from the pages of Wall Street Journal. But before you read it, I think what is becoming very clear is that there is an urgent need to push for a radical reform in microfinance. We have to build up public pressure on the MFIs to cut down on the rate of  interest, and at least bring it at par with what is being offered in the urban centres. There is no justification for charging a stupendous rate of interest from the poorest of the poor. MFIs are guilty of a crime, and I see no reason why they shouldn't be held accountable for the loot they have indulged in all these years.

The fact that SKS Microfinance is planning a public issue is still more worrying. To me it is like allowing the people in the cities to make profits literally from sucking the blood of the poor people.

What a shame. 

Now, read the WSJ article:

Group Borrowing Leads to Pressure

By Ketaki Gokhale

Hasina Bano, a silk-factory worker from Ramanagaram, says that, for her, the most difficult aspect of microfinance is that debts can become public knowledge in the community. So when she got in over her head with loans, she had two big problems: Difficulty repaying, and public shame.

While hers is just one person's experience, it's one indication of what can go wrong when microlenders suddenly flood into a community with almost no experience borrowing money.

Hasina Bano, 27 years old and the mother of three, makes about $8 a week working in a silk factory, and says she owes her microlender a weekly payment of $7.20.
A key premise of microlending is that borrowers must organize into groups of five, and guarantee each others' loans. The reason is twofold: It spreads the lender's risk, and it uses peer pressure to encourage borrowers to pay off the debt.

Microlenders argue that because women like Ms. Bano have no collateral or credit history, the group-lending system is the only means they have to ensure repayment. "Most of the members can cheat us, therefore we give loans only on group guarantee," said S. Panchakshari, operations manager of the Bangalore-based BSS Microfinance Private Ltd., in an email.

By the same token, borrowers within a group are expected to "support each other in times of trouble," said Samit Ghosh, the founder of Ujjivan, another Bangalore-based microlender.

Ms. Bano's experience indicates that the social pressure can be tough to bear.

Ms. Bano, 27 years old, makes about $8 a week working in a silk factory, and says she owes her microlender a weekly payment of $7.20. She has struggled to make the payments for years. Meantime, her groupmates are watching and waiting -- because they can't secure new loans until she has repaid her share.

"It's not just the debt that is a burden," says Ms. Bano, who says she twice tried to commit suicide because of the situation. "It's the shame of everybody knowing. Outside they all say to me, 'How could you get yourself into this mess?'

The mother of three said she had never taken loans before the microlenders came to town. Now she says she is obliged to take out a new loan with a different group of women to pay off her existing debt. To pay the debt, she says she has sold off her valuable possessions -- a mixer, a television, some brass vessels, a water boiler, and the family's mobile phone. A government ration card, which would give her 6 liters of oil and 20 kilograms of rice, was given away for $10.

The communal aspect of microlending has led to "fighting between friends, and even sisters," said Lalitha Sharma, another recipient of the loans. Two women in Lalitha's lending group ran away from their debts in 2007, leaving her and others to pay off their debts.

Mr. Ghosh of Ujjivan says: "We are ourselves worried about (the borrowers) running away" from debts, which is why "we tell our members to only bring people they know and trust" into their lending group. The system works best when group members help find a person who flees debt. "Frankly, if they can't help find the person, they have to chip in and pay up."

Meanwhile, Ms. Bano is fretting about what she'll do once the current payment strike comes to an end in Ramanagaram. "Where do I get the money from?" she said. "The people from the (microfinance) center don't give us any slack. I used to hide in my mother's place, and still they wouldn't leave."

Ironically, she has found some support in her microfinance groupmates -- they persuaded her that suicide isn't the answer, she says. "They try to stop me by saying, 'You'll repay the loan someday or another, but if you die, who'd take care of your children?'" Ms. Bano says.


Anonymous said...

Dear Mr Sharma
your ruse is that MFI's interest rate is high, can you suggest an alternative, you will agree that the poor will not have access to formal lending instiutions, as an Ex Banker I can vouch that the cost to the poor borrower who does get access to a small loan from a bank would cost 30% in terms of mandays lost in trekking 4-5 times to a Branch to fullfill the terms/submit forms etc
CGAP's finding may interest you especially para 4,7 & 8, in support of MFI's
Commitment to applying good practice in microfinance comes from the highest levels
of donor countries and agencies. In June 2004, the Group of Eight (G8) endorsed
the “Key Principles of Microfinance” at a meeting of heads of state in Sea Island,
Georgia, USA. Developed (and endorsed) by CGAP’s 28 public and private member
donors, the Key Principles are translated into concrete operational guidance for staff of
donors and investors in these Good Practice Guidelines.*
1. Poor people need a variety of financial services, not just loans. In addition to credit,
they want savings, insurance, and money transfer services.
2. Microfinance is a powerful tool to fight poverty. Poor households use financial
services to raise income, build their assets, and cushion themselves against external
3. Microfinance means building financial systems that serve the poor.Microfinance
will reach its full potential only if it is integrated into a country’s mainstream financial
4. Microfinance can pay for itself, and must do so if it is to reach very large numbers
of poor people. Unless microfinance providers charge enough to cover their
costs, they will always be limited by the scarce and uncertain supply of subsidies
from donors and governments.
5. Microfinance is about building permanent local financial institutions that can attract
domestic deposits, recycle them into loans, and provide other financial services.
6. Microcredit is not always the answer. Other kinds of support may work better for
people who are so destitute that they are without income or means of repayment.
7. Interest rate ceilings hurt poor people by making it harder for them to get credit.
Making many small loans costs more than making a few large ones. Interest rate
ceilings prevent microfinance institutions from covering their costs, and thereby
choke off the supply of credit for poor people.
8. The job of government is to enable financial services, not to provide them directly.
Governments can almost never do a good job of lending, but they can set a supporting
policy environment.
9. Donor funds should complement private capital, not compete with it. Donors
should use appropriate grant, loan, and equity instruments on a temporary basis to
build the institutional capacity of financial providers, develop support infrastructure,
and support experimental services and products.
10. The key bottleneck is the shortage of strong institutions and managers. Donors
should focus their support on building capacity.
11. Microfinance works best when it measures—and discloses—its performance.
Reporting not only helps stakeholders judge costs and benefits, but it also improves
performance. MFIs need to produce accurate and comparable reporting on financial
performance (e.g., loan repayment and cost recovery) as well as social performance
(e.g., number and poverty level of clients being served).

nikash said...

Dear Mr. Sharma,

You have been citing examples that are anti MFI..Can you do an in depth study.And i have always been noticing a unique ideal behaviour of so called intellectual society..i.e. pinpointing negativity from the positive efforts and positivity among the worthless... and sorry to say you are following the same league.

Devinder Sharma said...

I don't mind if my writings on MFIs are called negative. As long as the poor are being sucked by the MFI hawks, I will continue to raise my voice.

I fail to understand why Tata's are provide a massive loan at 0.1 per cent for the Nano car, whereas a poor woman has to pay back at 24-26 per cent for a paltry loan of Rs 7000.

This is because a lot of livelihoods of people involved in micro-finance depends upon exploiting the poor.

Devinder Sharma