The New York Times and Wall Street Journal are reporting on the impending implosion of microfinance in India, particularly in the state of Andhra Pradesh where subprime microlending has caused, or so it is alleged, a measure of microloan debt bondage, debt-induced suicides and rich profits for international investors, mostly Americans. Legislative-policy-by-press-release is in the works.
As reported in The Economist, the facts belie the hysteria. Contrary to the charge of microfinance over-indebtedness, only 11 percent of Andhra Pradesh residents have a microloan while a whopping 82 percent borrow from family, friends and loan sharks. And, for perspective, prior to the government's saber-rattling, microloan defaults were not on the rise -- a signal that a system-wide epidemic of over-borrowing was not underway.
Nonetheless, there are useful lessons to be learned:
One, once again the ugly reality of poverty confronts us. Assume the worst allegations are true and, some probably are, is there any doubt that in a world of economic apartheid desperation sometimes beats out hope? News flash: poverty is miserable, India has plenty of it, the Indian government is not doing enough and never has, there is no economic development elixir and the alternative to microfinance is a return to the tyranny of loan sharks.
Two, to state the obvious, poverty is the absence of money. Of course, the poor use microloans for non-business purposes. Microfinance provides the poor with money to start businesses, pay medical bills, cover marriage costs, put up a fence or even buy a bit of entertainment. It is the credit card most of us carry and use every day. What the poor don't need are debt wardens to monitor over-indebtedness or treat them like children with an allowance. Empowerment includes the poor making their own financial decisions.
Three, with some of India's biggest microfinance institutions, like SKS Microfinance, Spandana, Share and others, pounding the streets for customers, Andhra Pradesh is a robust microfinance marketplace. Here is the living laboratory for market fundamentalists who believe, apparently on faith, that competition and unbridled greed solves all social problems. As it turns out, sometimes financial services competition and hyper-lending bubbles are the root of the social problem.
Four, as I wrote in "Microloan Sharking" (2008), "the microfinance industry should anticipate governmental regulation and become proactive. Microloan borrowers operate their businesses in the informal economy, free from governmental regulation and protection. No enforceable usury laws, no consumer rights lawyers, no small claims courts, and no Better Business Bureau... Smart, mature, and successful industries have learned that outrageous marketplace behavior by the few invites governmental oversight of the many."
Five, microfinance should be about more than just money. No one wants to live in a community with bad schools, little health care, no electricity, filthy water, but with a great bank. Because poverty is a multi-disciplinary problem, multi-disciplinary solutions are needed. Let's start with financial literacy training, something we could all use.
For MicroCredit Enterprises (I am board chair), a nonprofit microfinance funder which deploys debt capital around the world (but not India), the ideal micro-borrower is a rural mother living on a $1.00 or less who is served by a nonprofit microfinance program that also provides education and social services. Because I have seen microfinance at its best, I know it is a valuable poverty alleviation tool.
As industry analysts, like Christopher Dunford, Niranjan Rajadhyaksha, David Roodman and Elisabeth Rhyne, note, the rush to conclude that microlending is inherently flawed is overwrought, wrong-headed and anti-poor.