Microfinance in the spotlight: can it exacerbate poverty?

With Milford Bateman’s new book ‘Why doesn’t Microfinance work?’ being in the spotlight, there are new questions being posed and rising concerns that the commercialisation of microfinance can in fact exacerbate poverty.

The Swayam Krishi Sangam (SKS) Society started with the help of international grants and soon became the fastest growing and largest microfinance institution in India. However, the initial funding of the SKS and the initial public offering (IPO) process underlined the faults with the traditional microcredit model and the pitfalls of commercialised microfinance. For more on this see our previous post.

Studies pinpoint that in large microfinance institutions like SKS, the cash raised through IPOs is unlikely to go into additional lending schemes. The main recipients and beneficiaries are those invested in SKS and not the very poor individuals in small communities.  Moreover, such institutions will often assist the phenomenon of ‘microloan bycicling’, with the very poor trapped in poverty due to microfinance oversupply and high interest rates while being forced to take out new loans to deal with the needs of their farming business and small family farms. Andhra Pradesh, the home state of SKS is a good example of the effects of oversupply on individuals and the community: 82% of small farmers in Andhra Pradesh are now in serious microdebt compared to 49% in the rest of the country.

As Milford Bateman underlines in his books, more loans or more microfinance will often result in more debt and subsequently keep individuals trapped in poverty.  Bateman more recently looked at the Inter-American Development Bank (IADB) 2010 Flagship Report which shows ways in which microfinance works in Latin American communities: too much goes to microenterprises and very little goes into small and medium enterprises.

The picture is not completely bleak and ODI’s Milford Bateman calls for a need to rethink microfinance proposing three major solutions:

  1. Need for an emphasis on genuine Northern Italy-style financial cooperatives and saver-owned and controlled institutions along the lines of the old Building Societies in the UK
  2. Need for community development banks to ensure financial support for the best local business projects and provide decent employment for member-workers, i.e. Caja Laboral Popular (CLP) in northern
  3. Focus on local credit unions to provide the very smallest of microloans used for consumption purposes

Bateman seems to believe that all of the above while crucial, we need to first distance ourselves from Wall Street-type organisations and aggressive commercialised microfinance institutions while placing the power back in the hands of local communities.

This blog has used information from the ODI article which can be found at: http://blogs.odi.org.uk/blogs/main/archive/2010/08/17/microfinance_SKS.aspx

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One response to “Microfinance in the spotlight: can it exacerbate poverty?

  1. Pingback: Tweets that mention Microfinance in the spotlight: can it exacerbate poverty? | RESULTS UK – The Power to End Poverty -- Topsy.com

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