The False Economist

Friday, January 28, 2011

Saving Microfinance from the wolves and vultures

There has been much criticism lately of microfinance and this has led to proposals for tougher regulation of microfinance institutions in India and other developing economies in which microfinance is operated.Some such lenders are acting increasingly more like loan sharks than community-based loan facilities for small, but significant, entrepreneurial activities.

A report by the BBC here shows that Indian officials are very concerned with these new microfinance groups  and their profit-driven agenda. These government officials have proposed setting a cap on the interest rates that microfinace groups can charge, a proposal which has been gaining support in recent months.

One particular reason for this is that "for profit" micro-finance institutions have been linked with with several cases of people who are unable to repay their loans committing suicide.Surely something needs to be changed so as to expunge organizations that act in such a bullying manner from operating under the banner of "micro-finance".

The Economist has a great article stating that better regulation and not a cap on interest rates may be the answer : Microfinance: Leave Well Alone.  

It's a very convincing argument and, for the most part, I agree. However, I think that any legislation should also re-emphasize the main aim of microfinance, which is to enable a person or a group to develop a business or project improving their standard of living and their community's well being.

NB. - Just noticed that, quite recently, one of the most criticized microfinance groups, SKS in India, had lowered its interest rates by a small amount following pressure from the Indian government and media.I wonder if several of these institutions will lower rates so as to allay any concerns about their practices and head off any new legislation.

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