The claims of microfinance are not necessarily dubious but then as the saying goes, there are three sides to every story—your side, his side and the truth. The good claims are trumpeted and the bad evidence is rubbished. It is a reminder that those who provide microfinancial services need to monitor carefully not only their positive impacts but also their negative effects. The microfinance industry needs to practice more humility about what it has achieved. It must learn how to manage rapid expansion while staying close to the poor female who have been their core clients.
More important, small loans are made available through hassle free processes and are delivered on time .The services are convenient and flexible, something which low income people value most. Despite what politician keep saying, it is hard not to be seduced by some of microfinance’s positive features. The most hardened critics also acknowledge it.
The idea that small loans enable millions of poor people to pull themselves up by their bootstraps captivated celebrities among liberals and conservatives alike in the early era of microfinance. It took a fairly long time for people to realize that they should not be lulled by the boom in microfinance into believing that it is a cure-all for global poverty. The glorified narrative of microfinance was so successfully pedaled that despite several backlashes, the hype created by the evangelists sustained its momentum .it is now accepted wisdom that not everyone is ready or able to take on debt.
The biggest problem with microfinance is that people who get these small loans usually utilize it for consumption — whether managing emergencies or cash flow pressures, paying for social or religious functions, or buying aspirational consumer goods.
Few start or expand a business-usually a simple one. The most common business for microfinance is simple retail – selling groceries – where there are often too many people, fierce competition, and where they don’t really earn enough money to get out of poverty.
In the good models, though, there is an emphasis on screening people to see that they have good investment plans that should bring in more income. The initial loans are also small, to give people experience, and they get counselling on how to run their businesses. well-run microfinance institutions lend for projects that are actually viable and do generate cash to pay off the loan and usually leave people better off.
Most MFIs are essentially hybrids with business and social goals; but with the passage of time, the order in which the two parts are mixed has been flipped. When it started, it was financial tools being used for social good. Now it has increasingly become a social mission used as a way to generate money which is why it has lost a lot of its original sheen.
What is then the best way of providing financial services to low income I people? Most of us know that our own view of a financial institution has been that it was a place to save. Borrowing might come later, but much later, and the purpose of saving was not to qualify for borrowing; it was a useful thing to do for its own sake.
Lenders mobilize the same forces that already oppress women, taking advantage of the inherent inequity of gender roles to apply peer-group pressure. This worsens, rather than improves, the situations of poor women. Children also suffer. Many children drop out of school to assist their parents in making weekly loan repayments.
Microlenders went into a tailspin when authorities in the southern state of Andhra Pradesh, where about 30 per cent of the industry’s total loan portfolio was then concentrated, ordered a halt to all collections on outstanding microloans, after a spate of suicides by highly indebted borrowers.
With the influx of commercial and institutional funds microfinance has become more professional, but has suffered possible “mission drift”;the pressure to generate profits has diluted the social mission
Money-lenders regularly grant extended grace periods and often accept payments in kind. Microfinance fails to take the money-lenders out of the equation, and money-lenders regularly supplement microfinance.
Most microfinance clients have no training, education, or role models in business, and therefore are unlikely to cultivate successful microenterprises on their own.
Incubate a culture of recklessness and irresponsibility
After microcredit failed to deliver on its big promises to reduce poverty, the argument that the only thing people need is access to financial tools has largely been discredited.
The high interest rates of microfinance were initially justified because MFIs needed to make I stat up investments and offered not only financial products and services, but also financial education, management training, value chain support, and social services. Later these were al lwitdrawn because they began to be seen as costs and n;ot investment ,and hence a drin on profits
These families also continued to borrow from informal sources, thereby plunging them into excessive indebtedness.
When microenterprises fail to make profits, clients must reduce their consumption, sell valuable assets, take on more debt from other sources, or default on their loans.
Are forced them to pawn valuable items, inciting other borrowers to humiliate them and orchestrated sit-ins outside their homes to publicly shame them.. On the dark mechanics of the money lending and the chilling consequences
which was sparked by concerns that microlenders were making windfall profits. Microlenders went into a tailspin when authorities in the southern state of Andhra Pradesh, where about 30 per cent of the industry’s total loan portfolio was then concentrated, ordered a halt to all collections on outstanding microloans, after a spate of suicides by highly indebted borrowers.
They need to pause, catch their breath and take stock.
In rural areas could collectively guarantee loans to a group through mutual support, peer pressure, and ultimately social ostracism if borrowers defaulted on loans.
(The writer is author of Village Diary of a Heretic Banker. He has spent more than three decades in the development sector)
Microfinance NGOs also play an important part in empowering the poor through values formation ,capacity-building and trainings in literacy, health, , leadership, social awareness and education self-reliance, market intervention, , which help improve a person’s total well-being that is essential in owning and managing an enterprise,