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To the Politicians of Andhra Purdesh: Give (Regulated) Microfinance a Chance

March 3rd, 2011

To the Politicians of Andhra Purdesh:

My name is Kevin Webb, and through the course of the past quarter studying women’s health internationally in general and microfinance’s impact on the wellbeing of women in particular, I have come to believe that microfinance as a whole still has a tremendous capacity for positive impact. I understand many of your frustrations with the industry—it is poorly regulated, it targets your least powerful and least educated citizens, and it has helped put an entirely new class of people into debt. Worse, even where it fails the people it is purported to help, microfinance is still uncritically viewed in the West as a finance-based means of combatting poverty.

Indeed, following Muhammad Yunus’s Nobel Prize in 1997 for his pioneering of microfinance with his Grameen Bank, microfinance has seemed like something of a panacea back in the US. Kiva.org has become a household name, and celebrities here from Bill Clinton to Natalie Portman (http://www.takepart.com/news/2008/03/07/natalie-portman-loves-kiva) have hailed its work. I myself donated $25 to an enterprising group of women in Sierra Leone who are trying to expand their baking business (http://www.kiva.org/lend/264387), and felt connected to this group of women in doing so. Should I recoup the investment, I’ll be able to give a little more the next time around.

To well-intentioned philanthropists, microfinance is a clean way to provide resources to people who need just a small amount to get themselves off their feet. This investment’s impact is enhanced by the interest rate charged, because it means any funds recouped can be reinvested in other people in need of help. More intangibly, the nature of American microloan aggregators like Kiva and MicroPlace make it so users can create seemingly personal connections with people they otherwise would never meet. That’s a potent emotional force for good, if harnessed properly.

As you are aware, this past November, politicians in your state implemented a wealth of drastic new measures designed to limit microfinance’s impact. At the time, there was good reason: where many microfinance organizations were continuing to operate quietly and ethically, others had taken advantage of good will toward the industry and begun to foment a cycle of debt for your state’s most impoverished. Banks have long done this with the middle class, but until microfinance, the world’s poorest have been seen as too high risk to warrant interest. Once Grameen and other organizations demonstrated that money and interest could be recouped, though, it became clear to some very cynical people that the poor were an enormous new segment of people to exploit financially. There are stories of people being hounded, day after day, to repay loans, and others of poorly educated farmers being convinced to take three, four, or even more loans simultaneously. 75 of your citizens took their own lives in response to their mounting debt. Let me be perfectly clear: these business practices are completely reprehensible, and you were absolutely correct in calling attention to them.

But the line you drew in the sand worked. In some senses, it worked too well—even the ethically minded organizations are considering pulling out of Andhra Purdesh entirely, because the rate of nonpayment has skyrocketed since October. This has ramifications for your state in barring access to life-changing loans, but it has more global impacts as well—should Andrah Purdesh continue to be a financial sinkhole, any institution that persists there will be losing out on funds it could be committing to people elsewhere.

That said, this new law had the tremendous impact of forcing India to draw up official regulatory laws to limit abuse through its Reserve Bank. Grameen was among the first to hail the new board, as it will cap loans and it will prevent more than two loans from being given, among other measures designed to protect the consumer. It may not be as strict as it ought to be, but it is certainly a start, and Andhra Purdesh has itself to thank.

I would encourage you to rethink your state’s much stricter policy in the wake of the Reserve Bank of India’s superseding, much more broadly applicable laws. It has been easy to rally popular sentiment against the organizations—some have been abusive, and many hail from the easy-to-hate West—but I hope you can find a way to lighten the rhetoric and to find a new scapegoat. Because when microfinance is done ethically, it is an incredibly potent force for good. And when it comes time for your next elections, would you rather be the politicians who ended a globally lauded practice, or the ones who stopped all of the bad things associated with it while keeping all of the good? In allowing a regulated form of microfinance, you will be making sure that your citizens still have access to loans that literally can change their lives. I’m no politician, but this seems like the best way to do right by your constituents.

Note: I will add sources once I get back to my computer.

Microfinance at an Inflection Point

January 26th, 2011

First, some updates: last week I said I would discuss the Omidyar Network, which is working to provide loans for larger-scale operations in third-world countries, but I’ve secured an interview with a managing partner there, and so I will hold off on that discussion until I can hold and then post the conversation.

In the meantime, the past week has brought a few new interesting twists to the arena of microfinance, particularly regarding the Grameen Bank. Currently, founder Muhammad Yunus is charged with defamation for a remark made in 2007, a charge that could result in up to two years in prison—a lowly outcome for a Nobel laureate. It appears as though Yunus has become a public face for the concept of microfinance, and appropriately or not, he is receiving much of the flack for its shortcomings (http://www.guardian.co.uk/social-enterprise-network/2011/jan/26/microfinance-and-the-muhammad-yunus-case).

In a BBC article published on the 24th, author Madeleine Morris mentions many of the mounting criticisms of the expanding business practice. Specifically, an MIT report conducted between 7000 households in India “found access to microcredit had no impact on three poverty indicators – women’s empowerment and expenditure on child’s health and education – over the 18 month period it tested.” Although 18 months is a short timespan, it likely reflects the fact that microloans are generally used to help smooth over rough financial patches, rather than to expand into new ventures. (http://news.bbc.co.uk/2/hi/programmes/newsnight/9369880.stm).

Compounding the issue is that because some for-profit organizations have used international goodwill toward microfinance to create what are effectively loan-shark organizations taking advantage of the poor, demanding exorbitant interest rates for unpaid debts. This has in turn led politicians in places like India to discourage repayment, which is why currently the return on investment in the country has plummeted to only 20%. As microfinance’s model, both for-profit and non-profit, depends on being self-sufficient, such massive rates of default could spell an end for some organizations.

This is why Grameen’s announcement this week is so interesting—as of the 21st, the bank has opened up a branch in our own San Francisco Bay Area, where they hope to provide small loans to some of our most impoverished citizenry, particularly women, who would normally be denied more traditional loans. Although Grameen has been in the country since 2008, I suspect that a part of the motivation for the expansion may be due to the anti-microfinance political climate abroad (http://www.chevron.com/chevron/pressreleases/article/01212011_chevrontoprovide1milliontohelpbringgrameenamericatobayarea.news).

In any case, it’s clear microfinance is at the crossroads of change. More money continues to pour in at record levels (largely from philanthropists), its impact is increasingly unclear, and the likelihood of repayment seems to be decreasing. The model is expanding into newer, wealthier areas, and even though microfinance may be doing more good than harm, its impact is limited simply by its targeting of very small operations.