Indonesia | Economics

Friday, August 18, 2006

The politics of microfinance

Source: www.indiatraveldestinations.comSmall is beautiful; big is a threat. One would think that nobody would ever see microfinance institutions — providers of micro-credits to poor consumers, widely perceived as the solution to their credit-constraint problem — this way. But apparently, the State Government of Andhra Pradesh did.

[It] came as a shock earlier this year when the government of Andhra Pradesh, the Indian state where microcredit has spread fastest, accused some leading microfinance institutions (MFIs) of behaving no better than old-style usurers. The lenders say they are being defamed, in a row that raises questions about their future in the state.

The dispute centres on one poor rural district, Krishna. Some women were reported to have killed themselves because they could not repay the MFIs...

Viswanatha Prasad of Bellwether, a fund that finances microcredit-providers, blames “indiscriminate expansion”. The MFIs were flush with money, partly because commercial banks saw them as a good vehicle for lending to rural areas. Some microcredit lenders were charging interest rates on the full amount of a loan, rather than the declining balance, and some borrowers were bullied and humiliated. Aggressive competition and a failure to share information meant some people were in hock to numerous lenders. That is what seems to have led to the suicides.

The case suggests a need to be more sober about the strengths and weaknesses of MFIs. There might be something out of it that regulators in Bank Indonesia can learn to strengthen regulations for microfinance institutions.

At the same time, the case also exemplifies an aspect in the politics of microfinance — where being small is beautiful, and being big, a threat. In this case, however, it wasn't clear that the State Government, who had argued for the closing of some of the MFIs, was a neutral party to the whole affair. Tyler Cowen, a professor of economics at George Mason University, who recently visited some of the MFIs in India, wrote in the New York Times:
Near Hyderabad, in the state of Andhra Pradesh, political opposition to microfinance has begun. State officials have fed negative stories to the media. They charge that microfinance debts have driven some people to ruin or perhaps suicide. They call Spandana’s programs “coercive” and “barbaric.” They question whether the “community pressure” behind repayment is sometimes too severe.

He then argued that:
The motives behind this campaign are twofold. The state is not a neutral umpire but rather has its own “self-help group” banking model, which lends at the micro level. Spandana and some of the other private microfinance groups are unwelcome competition. More generally, opposition to money lending has been frequent in the history of both India and the West. Not every loan will have a positive outcome, and it is easy to focus on the victims. Not all Indians have accepted the future of their country as an open commercial society with winners and losers.

This more general motive related to the general opposition to money lending, is also pertinent in Indonesia. Indonesians have the term "lintah darat" — blood-sucker — for traditional moneylenders. It is plausible that, without proper regulations, MFIs could eventually be seen as blood-suckers as they covered a broader set of poor customers and had to hedge greater risks. After all, if one thinks about it, MFIs and moneylenders aren't conceptually that different. In fact, one World Bank economist thinks that the idea to "co-opt moneylenders into the formal system” makes sense.

There is, I think, a third reason why people would turn their back on MFIs once they became big. People often have this idealistic notion that one should not make money (or, at least, too much money) from serving the poor — even if the poor's welfare is greatly improved by the service. As shown in India (and elsewhere), MFIs can become highly profitable when managed well. That is why, I usually recommend this book to anyone interested in poverty reduction (it's also available in Indonesian).

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