The second plenary of GDN’s twelfth Global Development Conference addressed the issue of “Rethinking Microfinance”.

Victor Murinde

Victor Murinde

For many years, microfinance has been perceived as a kind of ‘magic bullet’ that raises the income and consumption of the poor and helps them cope with poverty. For its supporters, microfinance is not about income or consumption, but rather freedom and empowerment (Rich Rosenberg CGAP). But the perception of microfinance is changing.

A study on the impact of Spandana microfinance in South India presented by Professor Dean Yang, Associate Professor at the University of Michigan, shows that the impact of microcredit schemes differ by subpopulation. He found that those who already have businesses invest in durables and restrict their consumption, while those who do not have or want a business consume more. Proof perhaps, that microfinance is not quite the magic bullet as its supporters propose.

New evidence from randomized control trials suggest two things: first that we need to change the way we think about microcredit and second, that we need to look to other types of financial services in delivering better financial services to a wider section of society. Professor Yang believes that savings, insurances and remittances are promising opportunities. However, research is needed in all the areas to determine how impacts can be maximized.

According to Professor Victor Murinde, from Birmingham University’s Business School, microfinance provides opportunities for a broad based financial system, poverty reduction and economic regeneration strategies. It also provides social protection by broadening access to finance, creating assets and preventing people from sliding back into poverty traps. However, people who use microfinance schemes face high levels of uncertainties such as complex procedures and high operating costs.

Can we learn from the current Indian microfinance crisis?

Financial inclusion has always been perceived as a development strategy, broadly recognized as an important element on the way to achieving MDGs. Over the past decade, poor access to microfinance has greatly improved. Much of this development is due to the growth of for-profit-microfinance. Such microfinance institutions have added to our knowledge of how to lend to the poor; have improved both the technologies and infrastructures needed to lend money; and have linked microfinance with the broader capital market. These are all valuable contributions.

However, this enforced process of lending has led to a microfinance crisis in the Indian State of Andhra Pradesh, with rising numbers of people who have been unable to pay back their loans committing suicide in desperation at their plight.

The Indian government, in response to the crisis, issued a moratorium on repayments in October 2010. As a result of this, major microfinance companies stopped issuing new loans and spillovers to microfinance initiatives in the state, and began operations in other parts of India and abroad. Professor Stefan Klonner, from the South Asia Institute, compared the Andhra Pradesh crisis with the global financial crisis. Policy makers have not adequately addressed the trade-offs involved in lending to the poor. He highlighted the need for a more holistic approach to microfinance, and to look differently at microfinance.


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