The myth of microfinance: who is freaking out?

In recent months, ‘the myth of microfinance’ has become a catch-phrase. A 2-minute google search throws up at least 9 articles that have the terms ‘myth’ and ‘microfinance’ in their title. See here – one, two, three, four, five, six, seven, eight, nine

In fact, it has sparked off a war of words between different camps of experts that work with the microfinance sector. All this, over a Boston Globe article that pokes a hole into the macro-romanticism of microfinance, quoting randomized experiments in India and Philippines. Amidst all this, I suspect all those who are actually in the market of microfinance have continued their busy lives giving out loans, collecting repayments and making their millions. And for that reason alone, I believe microfinance will continue to prosper. After all, what could be more attractive than a development project that created wealth at rates unheard of in the best financial markets and which promises empowerment, particularly that of women? With so much money being lent and repaid, heartwarming pictures of smiling women sitting in small groups, legendary stories of group discipline and peer pressure and the (reported) near-zero default rates (even before the specter of a global financial meltdown was upon us and Mohammad Yunus became the only banker that escaped unscathed), microfinance indeed is the star.

Sure, from the MIT and Yale studies, one could say that microfinance needs to go beyond just credit and include not just other financial services, but also complementary frameworks for developing livelihoods, improving access to essential public services etc – but in the absence of those services, we have microfinance and we can do what is possible to make sure it is well directed and regulated so clients dont get swamped by debt. Luckily, evidence from the studies suggests that clients are holding on just fine, at least for the moment. However, microfinance clients dont seem to have become any more empowered.

In spite of being a late arrival, this is an industry that has easily trumped conventional development sector programmes…mostly on the power of the profits it generates. Interestingly, this is highlighted by Banerjee (one of the lead researchers in the MIT study), in his Hindustan Times column where he points out the futility of expecting microfinance to work miracles and then lamenting its fallibility. I agree.

As long as microfinance continues to be a successful business proposition, I do not foresee its demise. I also do not expect MFIs to scale back on their work even if research proves that microfinance is not a miracle drug; and the development sector gives up its romantic dreams. Microfinance in its infancy was supported by huge volumes of soft money. Now, major players in the microfinance industry do not need any subsidies. They are willing and able to play the game on their own might and in the process, have reached out to millions of clients. In his column, Banerjee also takes us back to the basics – the importance of making financial services available to sections of the economy at rates that would have been unimaginable even a little more than a decade back and unless we have a better idea, we have to make our peace with it.

The problem with many ideas is the unrealistic promises they make. The problem with a lot of propaganda is that the risk of being exposed runs high. If microfinance can steer clear of inspiring romance, just reel in the drums and ensure that the business continues to prosper without hurting its clients, all would be well.

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