SlideShare a Scribd company logo
A critique of microfinance –
what‟s wrong and what‟s right
          Cranfield
        January 2011
Is Microfinance -

      An amazing new tool to rid the
           world of poverty ?

                    OR

Yet another way for international capital to
   marginalise and profit from the poor ?
What are MF‟s main features ?
•   Small loans
•   Only loans – not savings
•   Short terms, frequent repayments
•   Mainly for women
•   Mainly through some form of group
•   Unsecured
•   Mainly from specialised MFIs
•   Very expensive
Are these features „good‟ or „bad‟ ?

   Each feature has several „faces‟:

• It helps MFIs to do „good‟

• It also helps MFIs to „do well‟
Why are MF loans so small ?

- because the poor don‟t need big loans
- because they might not repay them
- because interest rates can be higher
Why don‟t MFIs take savings ?


- because the poor cannot save
- because MFIs cannot take
  deposits
- because it‟s cheaper to borrow
  from Citibank, ICICI Bank and SBI
Why short terms and regular
          repayments ?
- because poor people cannot invest
  for the long term
- because poor people are unreliable
- because we must get their money
  when they have it.
Why do MFIs lend only to women ?


- because it‟s good to empower them
- because women work better in
  groups
- because women are weak and they
  do what they are told
Why do MFIs work through groups?
      (Grameen or SHGs)

- to empower the poor and build
  community solidarity
- to outsource appraisal and collection,
  free of charge
- to mobilise (fierce) peer repayment
  pressure
Why is MF done by new
      specialised institutions ?
- because reaching the poor needs
  social commitment and new skills
- because the banks do not want to
  change their traditional methods
- because it‟s much more profitable
  than banking
Why is MF so expensive ?


- because the poor need service on their
  doorsteps, which is, sadly, very costly
- because moneylenders are the only
  competition
- because microcredit is like shampoo
  sachets - there‟s big money to be made “at
  the bottom of the pyramid”
Andhra Pradesh –
           what‟s gone wrong ?

•   Greedy investors
•   Foolish bankers
•   Misguided borrowers
•   Frustrated bureaucrats
•   Opportunist politicians
•   Irresponsible journalists
What‟s going to happen ?

• Collapse of the MF industry, insolvency –
  (not such a big deal for the clients)

• Gradual compromise, some slowing down,
  little learning, wait till next time

• Sort out, some well-deserved failures,
  survivors will learn and progress
How can MF be improved ?

•   NOT by capping interest rates)
•   NOT by „financial literacy training‟
•   NOT with foreign aid, DFID and so on
•   NOT by government control
Improvements
• Become banks or merge with or sell to
  banks – take savings
• Move to community ownership – MACS…
• Encourage „graduation‟, to „grown-up‟
  bank accounts
• Admit men, stop discrimination
• Add real insurance – not merely to protect
  loan balances
Exaggerated expectations
• MF is a short-term, temporary, low
  quality “band-aid” for poverty
• Stop the hype, accept that MF is NOT
  a panacea for poverty
• Would YOU bank with an MFI ?

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A cirtique of microfinance- what´s wrong and what´s right (2011)

  • 1. A critique of microfinance – what‟s wrong and what‟s right Cranfield January 2011
  • 2. Is Microfinance - An amazing new tool to rid the world of poverty ? OR Yet another way for international capital to marginalise and profit from the poor ?
  • 3. What are MF‟s main features ? • Small loans • Only loans – not savings • Short terms, frequent repayments • Mainly for women • Mainly through some form of group • Unsecured • Mainly from specialised MFIs • Very expensive
  • 4. Are these features „good‟ or „bad‟ ? Each feature has several „faces‟: • It helps MFIs to do „good‟ • It also helps MFIs to „do well‟
  • 5. Why are MF loans so small ? - because the poor don‟t need big loans - because they might not repay them - because interest rates can be higher
  • 6. Why don‟t MFIs take savings ? - because the poor cannot save - because MFIs cannot take deposits - because it‟s cheaper to borrow from Citibank, ICICI Bank and SBI
  • 7. Why short terms and regular repayments ? - because poor people cannot invest for the long term - because poor people are unreliable - because we must get their money when they have it.
  • 8. Why do MFIs lend only to women ? - because it‟s good to empower them - because women work better in groups - because women are weak and they do what they are told
  • 9. Why do MFIs work through groups? (Grameen or SHGs) - to empower the poor and build community solidarity - to outsource appraisal and collection, free of charge - to mobilise (fierce) peer repayment pressure
  • 10. Why is MF done by new specialised institutions ? - because reaching the poor needs social commitment and new skills - because the banks do not want to change their traditional methods - because it‟s much more profitable than banking
  • 11. Why is MF so expensive ? - because the poor need service on their doorsteps, which is, sadly, very costly - because moneylenders are the only competition - because microcredit is like shampoo sachets - there‟s big money to be made “at the bottom of the pyramid”
  • 12. Andhra Pradesh – what‟s gone wrong ? • Greedy investors • Foolish bankers • Misguided borrowers • Frustrated bureaucrats • Opportunist politicians • Irresponsible journalists
  • 13. What‟s going to happen ? • Collapse of the MF industry, insolvency – (not such a big deal for the clients) • Gradual compromise, some slowing down, little learning, wait till next time • Sort out, some well-deserved failures, survivors will learn and progress
  • 14. How can MF be improved ? • NOT by capping interest rates) • NOT by „financial literacy training‟ • NOT with foreign aid, DFID and so on • NOT by government control
  • 15. Improvements • Become banks or merge with or sell to banks – take savings • Move to community ownership – MACS… • Encourage „graduation‟, to „grown-up‟ bank accounts • Admit men, stop discrimination • Add real insurance – not merely to protect loan balances
  • 16. Exaggerated expectations • MF is a short-term, temporary, low quality “band-aid” for poverty • Stop the hype, accept that MF is NOT a panacea for poverty • Would YOU bank with an MFI ?