Over the past three decades, microfinance, originally pioneered in rural Bangladesh, has spread dramatically and attracted worldwide attention. The idea of lending microcredit to women and poor families without collateral in order to help them break the vicious cycle of poverty has been replicated in many countries of the world, including some developed ones. Microfinance, as various literatures reveal, offers tremendous benefits to poor individuals and families to manage immediate household necessities, fulfil other basic needs, and start up micro-enterprises.
Nowadays, it has become a norm in many development organisations or projects to organize meetings where rural women congregate, collect tiny amounts of money, discuss their issues, and lend some amount to a needy member to support her urgent needs. Microcredit groups have provided them a platform to discuss their issues, and helped them in many activities including standing on their own feet, rescuing families from difficulties, and sending daughters to school along with sons. In these meetings, some women raise pertinent issues of the community, sometimes taking their male counterparts aback. In this way, women’s participation in economic and social sphere of life is helping them gain respect within their families and beyond.
A number of studies have been claiming the positive impacts of microfinance in the lives of women and poor, impacts such as increase in income, better livelihood situation, improved self-esteem and empowerment of women, to name a few. Many researchers, on the other hand, have found microcredit lenders failing badly due to misappropriation and defaulting.
In fact, microfinance has come under scrutiny in recent years and received sharp criticisms worldwide. Microfinance institutions (MFIs) in Nepal, and elsewhere too, are accused of charging higher interest rate than commercial banks, which contradicts their mantra of uplifting the poor and powerless. The institutions seem to be more concerned about collecting instalments from the borrowers than helping them start and succeed in business endeavours. For resource-poor families, credit alone is not sufficient to succeed in business, they also require knowledge, skills, motivation and ways of managing other internal and external factors. A number of cases have come into notice where the borrowers have failed in their enterprises and once again fallen prey to local money lenders who charge high interest rate.
Despite its long history in Nepal, microfinance is available only in a few Terai districts and some accessible hill locations. Even in these locations, it is criticised for being unable to reach the poorest sections. The viability of microfinance in these areas is impeded by difficult geography. Remoteness undermines the potential of microfinance by increasing the cost of production, transportation, and even of providing services. Protecting the poor communities in the remote area by promoting microcredit can only be possible after these issues are sorted out.
Some experts criticise microcredit of just inducing resource-poor families to increase household consumption expenditure, when they had to be coached to use credit wisely as investment. In some parts of the country, MFIs are mushrooming, but they lack coordination and cooperation among themselves. This has resulted in various families become members of multiple MFIs. Because many of them are unable to use microcredit properly (due to various reasons, some discussed above), many families have been fallen into vicious cycles of debt. It is a tragedy that microfinance has become a ‘poison’ to the poor rather than a medicine to cure poverty.
In comparison to Grameen Bangladesh, a pioneer microfinance institution, we have significantly fewer female staff. It is highly important to involve women, especially in the backdrop of a patriarchal society like ours, because they can be instrumental in pointing out issues of discrimination and marginalisation. Many groups’ regular meetings end with savings collection and credit disbursal, without a discussion on economic and social issues. For it to help develop a large number of productive and sustainable livelihoods, microcredit should be integrated with technical support for business and other sectors. Therefore, microfinance should not be an isolated or one-dimensional activity of just lending and collecting money, but be made a vehicle for holistic social transformation.
For resource-poor families, credit alone is not sufficient, they also require knowledge, skills, and motivation.
Recently, there has been a fashion of starting saving credit groups, mostly initiated by NGOs and INGOs. Funds of such credit groups are frequently at risk of being misappropriated, and could become a source of conflict in the community. Therefore, it is necessary to bring such groups under a formal or legal structure. On the one hand, legal status stops embezzlements, while on the other, it creates opportunity for the organization to grow by linking it with other organisations. Similarly, we have found a lack of monitoring and follow up from MFIs to check if the lenders are doing well or need support. The government should develop mechanisms to encourage the organisations working in needy areas to work with greater impact on the social and economic transformation of marginalised communities
Despite criticism, microfinance and microcredit is not always bad for the poor and powerless. The problem most often lies in the approach we take. No strategy of development and social transformation can be complete in itself and free from criticism. Each strategy has its own strengths and limitations, and microfinance is not an exception. Microfinance is not a magic bullet to solve all human miseries. It is neither a panacea of poverty alleviation, as some argue, nor completely worthless as some believe. Microfinance has a huge potential to become a powerful vehicle to address economic injustice and poverty, though it definitely needs improvement in its current state. It’s high time we seriously analysed the approach we have taken, and moved to a renewed crusade against poverty. Mohammad Yunus, the Nobel Peace Prize laureate and a pioneer of microcredit also reiterated in his recent visit to Kathmandu that to solve social problems, microfinance of Nepal needs to move to the next level of development.
The authors are development professionals. The views expressed in the article are personal.