Is it Micro Usury? Ethics runs smack into profit in the debate on the small loan business

Micro Gain, Macro Pain
Microfinance institutions make big claims, but critics point at the holes.

Financial inclusion		Opaque benefits
By March-end 2009, over 22 million people were beneficiaries Rs 25,000-30,000 crore deployed in the system Large funds flowing to sector from banks and equity investors Reach out in areas where banks have been tardy in providing service Rapid scaling up through innovation/ technology to cover remote areas Loan repayment remains over 95%		A significant percentage of clients exist only on loan books Poor may be benefiting but high MFI profitability raises questions Steep interest rates, sometimes over 40%, defeat purpose of helping poor Tight schedule of weekly repayments putting tremendous pressure Proxy agents flourishing due to lack of checks and balances No data available on indebtedness

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India’s microfinance institutions (MFIS) have often hit the headlines. But this time, they are doing so not necessarily for the right reasons. They have been accused of making huge profits and ensuring their own topline growth at the cost of the poor whom they aim to help with easy and affordable credit. SKS Microfinance, one of the biggest MFIS, hit the high streets with a very successful IPO and listing in August. But this raised questions about the firm’s operations and profit motives. What particularly drew strong criticism was SKS chairman Vikram Akula and other top management making millions through stake sale and ensuring high returns to equity investors. This criticism came from none other than the father of modern microfinance, Nobel laureate Mohammed Yunus, with whom Akula first worked at Grameen Bank in Bangladesh. Questions are also being raised about the coercive tactics used in many cases to ensure weekly repayments and the steep interest charged by the MFIS, sometimes over 40 per cent. In what way are these charges justified?
Though the avowed intention of MFIS and banks providing microcredit is to help small borrowers, there is increasing evidence to show its cumbersome processes are forcing landless farmers and traders to seek out the traditional moneylender. On the flip side, loan beneficiaries often face undue pressures. Last month,  over 1,000 women members of 50 self-help groups in Bhubaneswar protested against the high interest charged by MFIS. The first farmer suicide in drought-hit West Bengal this year is also traced to the harassment over loan repayment.

Microcredit, Macro Issues

Walden Bello | October 14, 2006

The awarding of the Nobel Peace Prize to Muhammad Yunus, regarded as the father of microcredit [1], comes at a time when microcredit has become something like a religion to many of the powerful, rich and famous. Hillary Clinton regularly speaks about going to Bangladesh, Yunus's homeland, and being "inspired by the power of these loans to enable even the poorest of women to start businesses, lifting their families--and their communities--out of poverty."

Like the liberal Clinton, the neocon Paul Wolfowitz, now president of the World Bank, has also gotten religion, after a recent trip to the Indian state of Andhra Pradesh. With the fervor of the convert, he talks about the "transforming power" of microfinance: "I thought maybe this was just one successful project in one village, but then I went to the next village and it was the same story. That evening, I met with more than a hundred women leaders from self-help groups, and I realized this program was opening opportunities for poor women and their families in an entire state of 75 million people."