Microfinance is about small loans to those with low income in the informal economy. These three factors pose three unique challenges. The small loan size means a different kind of economics and business model from mainstream banking with distinct processes and cost-efficiencies, since the income per loan is particularly low. That the borrowers have low income means the risks are large; small shocks in the family or larger system can have devastating impact on a borrower’s means to repay. And finally, lending to the informal economy presents a different set of challenges in that there is no documentation to verify assets, occupation, income or anything about the person.
The microfinance industry is still grappling with these challenges, learning many of the lessons the hard way. With lending rates now limited to 26 percent under the new regulation, gone are the days … Read More »
In a country like India, where over half the population scratches out a living in a manner that could be called ‘self-employed’, access to loans was going to be the magic bullet that was going to catapult them to greater economic gain. Microfinance for microentrepreneurs. Never mind that in the end most who borrowed never spent the money on a real business. What about those who did?
In any other realm of entrepreneurship, investors and lenders do extensive due diligence on past financial records and make laboured assessments of business plans and management teams. In the case of the microentrepreneur, every transaction is in cash, accounts are rarely recorded and there is hardly any reliable evidence available of their past success or data with which to assess their future potential. Furthermore, most ‘microenterprises’ are not profitable when you factor in … Read More »
The numbers that describe India’s economy are mindboggling. Just one-tenth of the population participates in the formal economy. Of these, only about 35 million pay taxes. That’s less than 3%.
No wonder then that our economy produced a GDP of only $1.42 trillion at last count, about the same as that of the city of Tokyo which has a population of 35 million. There are simply too few producing value and wealth in India and so there is not enough to go around.
The financial inclusion agenda so far has been largely focused on redistribution of wealth while what is required is inclusion in the creation of wealth. Financial inclusion so far has meant debt distribution and nofrills bank accounts.
Microfinance has been one major channel of debt distribution to the poor. While the original assumption was that these loans were for investment … Read More »
MFIs can operate as subsidiaries of banks, using a bank’s access to low-cost funds to lend cheap to the poor.
In 1995, Bank of Madura had 95 rural branches that were generally unprofitable. Deposits in these branches were too low and defaults on loans too high to justify the cost of servicing these communities. Besides, the bank’s staff disliked rural postings and it was difficult to attract talent into these areas.
The then Chairman & CEO, Dr K. M. Thiagarajan, in his bid to develop a profitable model of rural lending, pioneered the model of Self Help Group (SHG) lending, that was a hybrid between the Grameen Joint Liability model and mainstream banking.
Lending was done to a group of 15-20 women, who were co-guarantors for one another. They would meet locally to pool their dues once a month, and two of the … Read More »
Cataclysmic events are no strange beast to the banking business. As for microfinance, the sector will survive even as some players drop out.
Sure, I say. I’m taking a contrarian position in the industry and here’s why. Let’s look at why people have loved the microfinance industry, at least in the past.
First, there was enough propaganda that it was alleviating poverty to make you feel good about association. And proponents will still argue that if some of the struggling MFIs are allowed to fail, it will crush the dreams of financial inclusion and, thereby, a chance to ‘better the lot of the poorer sections of society’.
This simply does not hold. Six years into this, it is starkly apparent to me that financial inclusion in the form of high interest loans does not better the lot of anyone very much. There is … Read More »
The last decade has seen a sensational rise and fall of microfinance in India. After the crisis in Andhra Pradesh (AP) that claimed debt related suicides on account of exorbitant interest rates and high pressure collection tactics, the Reserve Bank of India (RBI) has finally put in place regulations based on the recommendations of the Malegam committee. With massive defaults to contend with and the new regulation that places caps on the rates and spreads, the industry is struggling to find its feet again. Many of the less efficient players are out of luck and out of business. Others are tightening their belts and getting more efficient in their operations. But, is microfinance 2.0 just about process efficiency? Or can it be something greater?
Where it began
Let’s start with the premise of microfinance and what it started out trying to … Read More »
For people engaged in the social entrepreneurship space, one of the most difficult questions is how to measure the positive social impact you make. How do you know you’re doing net social good?
What we typically do is assume that our product has intrinsic positive social value and so simply measure how many people have used our product or service. Then we make grand statements like ‘We have positively touched a million lives’. For some products this might be all it takes. Take solar lanterns, for instance, a solar alternative to kerosene lamps that is cheaper, brighter and healthier. A simple count of product sales in un-electrified areas might be a pretty reasonable indicator. For many other products and services though it is far more ambiguous. Microfinance, pharmaceuticals, health services, education. All of these have great potential for good but also … Read More »
Social Entrepreneurship is the new buzz word in India and marks a shift in thinking away from non-profit models to market based solutions that can operate at large scale and therefore create social value more systemically.
But what puts the ‘social’ in social entrepreneurship? We all have a notion that it means starting a business that does good for less fortunate folk. So we commonly think of a social entrepreneur as someone who is addressing a low income market with a product that can raise standard of living, either by providing greater opportunity or convenience. However, as I have discovered over the past five years, simply product and market are not sufficient.
Microfinance, for instance, provides a very interesting, and particularly sticky example. The product – basically money – has tremendous potential. Great things have been done with money. You need it … Read More »
Of all the arguments I have heard in support of rapidly scaling microfinance the one I have heard the most is that there is huge demand for money among the poor. Of course there is huge demand. The less you have of it, the more desperately you need it – to tide over the pain and struggle of every day. The next meal, school fees, doctor fees, a pair of shoes, a movie to escape from reality, a drink or two to forget. It’s a painkiller.
When you’re in severe pain, you need a painkiller. What you care about is relieving the pain now. Today. When you are in desperate need of money you don’t have, and it is dangled in front of you, you will take it. But painkillers are insidious.
A friend of mine in the USA once began taking … Read More »
According to the microfinance calendar, the last ten years were the decade of the cow. We celebrated the cow as the path out of poverty. At Madura we even benchmarked the loan amount to the cost of a cow. What good is a loan if it’s not even enough to buy a cow? And so over the last decade the microfinance industry has supported the purchase of millions of cows across the country. Millions of scrawny cows with poor yield it turns out; a hallmark of the inefficiency of microenterprise. I for one am glad to be past the decade of the cow and am excited and hopeful that this decade we will do away with celebrating cows – and pigs and goats and chickens and antiquated sewing machines and cottage industries – and celebrate instead the human being and … Read More »
I am now writing a weekly column for YourStory (www.yourstory.in), also called Physics of Poverty that will post every Monday. Some things taken from what I have already written here but also some new stuff. I will start posting the column here as well. Here is the first post that appeared last week.
What is the question?
Physics of Poverty series by Dr. Tara Thiagarajan, chairperson, Madura Microfinance Ltd.
Alright, I’ll come right out and say it. Microfinance has done very little to alleviate poverty. Practically speaking, even after five loan cycles, virtually all of our borrowers are still poor—poor enough to be eligible for yet another microfinance loan.
The premise of microfinance has been that giving poor people a loan is all they need in order to get out of poverty. This presumes that simply giving someone money will first turn them into … Read More »
Today there are many development economists that focus on social impact evaluation studies. These studies typically compare groups receiving an intervention to groups that did not. For example, did the group that received microfinance do better than the group that did not? Although they attempt to ‘control’ for variability between groups, I see some fundamental flaws in this approach. First, to be meaningful comparison, a ‘control’ group must be independent of the intervention group. In society, which by definition is an interconnected system, this is virtually impossible and you can never control this way for network effects.
For example, lets say the people who received microfinance in the village used the money to buy goods from the people who didn’t. Its not impossible that this could result in the ‘control group’ getting richer because they could sell more. Compared to them, … Read More »
We (Madura) recently launched a classified ad newspaper that reaches 400,000 poor rural households in Tamil Nadu. Our women borrowers can advertise their products, services and things they want to buy and sell free of charge while companies must pay. This is a hard to reach demographic that does not generally interact with print. One of our office locations used a women’s day event that gathered 700 of our women borrowers to launch the paper in their area. I didn’t attend this launch but our CEO reported to me that a very large number of women took the paper that was handed out and immediately used it to wrap up the snacks that were served to them.
(One useful statistic to put this in context is that about a third of our borrowers cannot read. Still….)
Thought this would be interesting to all of you folks who are interested in making sense of the recent financial crisis (and/or trying to figure out if there is a microfinance investing bubble in India). Physicists Didier Sornette, Ryan Woodard and some others have been working to create predictive ‘bubble diagnostics’. These diagnostics are based on non linear positive feedback models that have their basis in imitative human behavior. They are running The Financial Crisis Observatory which they describe as “a scientific platform aimed at testing and quantifying rigorously, in a systematic way and on a large scale the hypothesis that financial markets exhibit a degree of inefficiency and a potential for predictability, especially during regimes when bubbles develop”.
Last year they published a paper called Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis in … Read More »
The traditional thinking in microfinance is that it is a way to help people extricate themselves from the clutches of local moneylenders who charge exorbitant interest rates. As microfinance institutions, we believe, that by charging less we are doing great social service. Typically, when academics study the impact of microfinance, they look at people who have received microfinance compared to people who haven’t in order to see who is better off across various dimensions. Evidence suggests that even if individual borrowers are not actually making profits that exceed the interest charges, they might do better on other dimensions that relate to patterns of consumptions. Access to a lump sum of money at once, for instance, allows borrowers to afford goods and services they would otherwise not be able to that give them a better quality of life. However, if we … Read More »