Microfinance - A Bittersweet Symphony ?

Over the last weekend, I visited NEED, an NGO (Non-Government Organisation) cum MFI (Micro-Finance Institution) which has an Asoka Fellow Mr. Anil Singh as its CEO. Though an age old concept no doubt, MFI has only recently been organized and rendered profitable by the Grameen Bank (literally, "bank for villagers") leader and Nobel leaurate Mohammad Yunus. It is now seen by not only World Bank, UNO and national governments, but even by corporate banks and private equity funds as sure shot fame for their CSR efforts. Lending to Self Help roups (SHGs) and Joint Liability Groups (JLGs) as opposed to individuals lowers moral hazard because of social retribution, and allows freedom from exorbitant money-lender interest rates which can be anything from 50-100% (and even more) for a month. These micro-loans allow women entrepeneurs start up small businesses like buy a sewing machine, makeshift grocery shops and calling booths, handicraft, basket making, dairy farming etc. Women folk are focussed upon for they have a higher repayment rate, invest the profits back into the business, spend extra profits on family health and child education, and traditionally are unemployed because of cultural restrictions on their working outside the home.

The interaction with such women when on a field trip to Lucknow (NEED headquarters), brought to fore not only high interest rates but also restrictions on borrowers to repay principal amounts by the individual money lenders. For example, for a loan of Rs. 10,000 the money lender would allow the borrower to repay interest of Rs. 1000 every month but would insist on taking back the principal amount in its entirety which would never be possible because of hand to mouth existence of such income stratas and lower saving capability. The result would be piling up of interest and perpetual debt. This is where MFIs come into picture and allow borrowers to repay Rs. 1000 per month for 12 months and set the borrower debt free at the end of this period.

But though MF has been famed as an elixir to end desparate starvation and poverty, even the goody-goody MFIs often end up exploiting this need for cheap credit, often forgetting the most integral social engineering need for such efforts. Loans are given freely in urban slums, creating credit bubbles and indebtedness. Early repayment of loans is not allowed and MFIs group together in urban slums instead of expand into hard to reach rural villages. This encourages borrowers to take one loan for the repayment of another and spend the loan on consumption than on creating new self livelihood mechanisms.

Branding such MFIs as mere businesses, Mr. Singh of NEED calls for a principle of "Equity for Equity" - micro-finance with social justice and creation of livelihoods as its main objective than just a provision of cheap credit. NEED identifies whether an individual is capable of servicing such loans through sustainable start ups and provides consultation for the same for the first 1-2 months. Only then when it feels that the person will engage in a long term livelihood through credit does it agree to give them a loan while allowing early repayment. Further, it establishes market linkages for such individuals, gets patenting for their handicraft techniques, encourages organic farming and free trade products, and most above all, practices social engineering before considering MFI as another profit driven opportunity. This is truly "just-profit" and should be promoted by governments by disbanding such MFIs from NGO or NBFC (Non-Banking Financial Corporation) status which (i) do not allow early repayment of loans, (ii) venture into areas where more than 70% of the locals are already covered, (iii) pump back less than 80% of their profits into new loans, (iv) do not offer consultation for livelihood creation and (v) do not have mechanisms to check the potential of an individual in creating a sustainable business before servicing him a loan.

As a harbinger of a unique model of micro financing, NEED can lead other MFIs in their reorientation towards social empowerment over and above availability of credit. NEED should, besides diversifying its loan products and social engineering efforts to expand its reach, lead forums of MFIs for ushering in such understanding of social empowerment, train new MFIs to go the NEED way than the business MFI way, and liase with the government and SADHAN to brainstorm above mentioned recommendations for effective livelihood creation. Without such a social brainstorming, micro finance would remain no different than cheap yet soul less money-lending.