Microfinance, which was once
applauded as a magical bullet against poverty, has come under attack. Micro financiers are
increasingly accused of seeking hyper-profits from the poor through
overlending and coercive debt collection tactics. After the global financial crisis,
today even microlending appears to be steered toward a mini financial crisis.
Introduced by Muhammad Yunus in Bangladesh in the 1970s,
microfinance business has grown from a small program into a worldwide movement
today. Prior to microfinance, the world's poorest people were almost under-served
by financial institutions as they were unable to offer the necessary collateral
to secure loans. Moreover, most banks would not consider allowing small
loans to be appropriate as transaction costs would be prohibitive. In India,
around 42% of people lack access to formal banking services. In the absence of
formal access to financial services, the poor have no choice and were
exploited by local money lenders with exorbitant interest rates ranging from 30 to 120%.
It all began in the country with small informal hard work to provide
savings and credit services through Self-Help Groups (SHG). From there, the
sector has evolved through two main channels—SHG and Grameen
Bank replicator model followed by most microfinance institutions (MFI),
tiny loans to poor and small entrepreneurs. The industry, hailed as a silver bullet
to uplift the poor, has grown into a $7 bn and has expanded at an average
62% over the past five years in terms of customers and 88% in terms of credit.
The industry has around $6.7 bn in outstanding loans to 30 million
borrowers and has thus turned into a global business that links global finance with
some of the world's poorest communities. The micro lending business in India is
bigger than Bangladesh and most of it is financed by banks and is not through
savings.
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