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Microfinance institutions feel “growing pains”

January 4, 2011

(c/o 12Manage)

PhilanTopic had a great year in review piece about microfinance with a section near the end focused on India.  We at SAPP have noticed that microfinance is a topic of great interest to our readers and probably to South Asian donors in North America more generally.  Maybe it’s due to our community’s general interests in business, entrepreneurship, leverage, etc. that many South Asians seem to feel microfinance is the best philanthropy answer.

Well, it turns out there is probably no solution without its share of problems.  The PhilanTopic review cites some evidence this year that microfinance may have some problems that still need to be figured out.  For example:

The profits-versus-altruism debate heated up over the summer, when one of the world’s largest microlenders, India-based SKS Microfinance, went public, raising $358 million. Eyebrows were raised when it was revealed that the company’s founder, Vikram Akula, and other investors, including a number of prominent Silicon Valley venture capitalists, stood to profit handsomely from the IPO…

By the end of the year, reports started to emerge that Indian microfinance institutions were facing many of the same difficulties as struggling MFIs in Haiti. Indeed, in November it was reported that almost all borrowers in Andhra Pradesh, one of the country’s largest states, had stopped repaying their loans — egged on by local politicians who accused the microcredit industry in India of profiting on the backs of the poor.

I found this BBC article about a recent spate of suicides by poor farmers and others in India who cannot pay back their microfinance loans to be the saddest news of all.  I worry about the proliferation of microlending institutions and wonder: If microfinance is driving people to suicide, then aren’t all of us who have donated to these lending organizations to blame?  What is the right answer in terms of charity versus lending?

In the words of Muhammad Yunus:

We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks. Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.

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