Lecture 11: Criticisms and Contributions of Microfinance

Question 1

Commercialisation of Microfinance

Answer 1

• Shortage of funding is a problem to many MFIs.
• Consequently, many observers argue for commercialisation of microfinance to achieve ‘financial sustainability’.

Key principles of commercial approach to microfinance
* Profitability, * Competition, * Transformation (to commercial banks, consumer finance companies etc.), and * Regulation.

Many MFIs are now getting increasingly profit-oriented, adopting the techniques, funding or governance of for-profit ventures

Question 2

Concerns with commercialisation

Answer 2

However, despite these benefits many sceptics believe that the commercialization of microfinance will inevitably result in the profit motive replacing the social mission. ]

• This is often referred to as mission drift.
• As MFIs transform into regulated entities, shareholders consequently may demand for higher returns

This drift down them toward offering larger loans to higher income clients, thus shifting services away from the poor.

Question 3

Microfinance Over-Indebtedness

Answer 3

Thus we may define over-indebtedness in microfinance as follows. * A microfinance customer is over-indebted if s/he * Continuously struggle to meet repayment deadlines, * Repeatedly has to make unduly high sacrifices to meet his loan obligations

• The sacrifice-based definition excludes borrowers who strategically default on their loans. * They * Deliberately accumulate unsustainable amounts of debt, * Relying on a bail-out or the option to switch to a new provider

Question 4

What’s Wrong?: Microfinance

Answer 4

In brief, MFIs generally reach
* A combination of poor and non-poor people.
* Rarely do they reach the poorest. * Loans are commonly used for many different purposes: * Microenterprise, * Education and health expenses, * Repaying debt, * On-lending, * Wedding celebrations, and * Even dowry.

Second, complaints are rampant that MFI field staff have treated clients badly

However, it is clear that the performance indicators used by many MFIs * Put pressure on field staff to achieve financial targets

Question 5

What’s Right?

Answer 5

• First, most obviously MFIs provide basic financial services to millions of poor people: loans, savings and (increasingly) insurance.

Moreover, the microfinance movement has contributed to “democratising global financial markets through new contacts, organisations and technology.

Question 6

Changes Are Required

Answer 6

MFIs and their funders need to be more truthful about microfinance products and their impacts. * They need to be much more transparent about their charges, terms and conditions. * MFIs are to reduce the likelihood of client abuse and improve social performance.

Second, MFIs need to moderate their claims about reaching the poorest and reducing poverty – unless they have rigorous and independent evaluations that provide credible evidence.

Question 7

Regulations

Answer 7

Regulators need to be cautious about setting interest rate ceilings on microloans. * If set too low, this may reduce the financial service choices available to poor people.

There is a need to amend banking regulations in many countries, so that wellmanaged MFIs can offer more savings services to their clients.