By: Brendan Rigby
“The microlending movement that was supposed to help lift millions of people in India out of poverty has in recent weeks fallen into chaos.”
This was the lead for the Wall Street Journal’s feature article on the current microfinance crisis in India. The article goes on to shine a rather critical light on the microfinance sector, a sector which in recent times has enjoyed widespread support from both the international development and poverty alleviation professions and the public at large. This scrutiny is perhaps long overdue, as public contributions to microfinance become more and more available through innovative peer-to-peer platforms (P2P).
The Wall Street Journal article covers the situation unfolding in the southern Indian state of Andhra Pradesh. It is a clash of microfinance models, triggered by reports of suicides among over-indebted borrowers; a fight by between private for-profit microfinance organisations and government-backed ones for the debt of the poor. Growth in the microfinance sector has exploded in recent years in Andhra Pradesh, raising debt stress and threatening the sector nationally. There is already plenty of insightful and critical analysis out there, which will not be rehashed. Instead, I want to use these events to reflect on approaches to microfinance and start a conversation around new directions in microfinance.Efforts to map the distribution and reach of microfinance globally have not been undertaken as of yet. The Microcredit Summit Campaign estimated as of 2006, over 3,100 microfinance institutions (MFIs) were providing financial services to more than 113 million poor people worldwide. The highest concentration of MFIs are in India. However, the UN Capital Development Fund estimates that that between two and three billion people still lack access to a broad range of financial products and services on a sustainable basis. In an continually integrated and global economy, this exclusion makes them more vulnerable to economic shocks and fluctuations. However, has the inclusion of those wanting access to credit (and debt) achieved social and economic development goals? The success of microfinance depends on the question being asked.
David Roodman, of the Center for Global Development, asks a simple and poignant Sen-like question – does microfinance expand or contract freedom? “A simple question…led us onto a vast and variegated terrain. The root of much of this complexity, noted at the outset, is debt’s double aspect as a source of both possibility and obligation.” As a demand-led sector, what is microfinance supplying borrowers with? Possibility and/or obligation? Is it providing them with a loan to establish a sustainable livelihood? Is a business loan what people want?
Like all who use credit, poor people have complicated financial lives and need money for things besides business. Older research, since the 1980s when microcredit became available, generally found that it increased household incomes. More recently, the picture is changing. A survey in the Philippines of microfinance borrowers found that 46% of borrowers used a decent part of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase. Fewer than 4% of people in either category ever admitted this to their bank. Richard Rosenberg, of CGAP, declares: “I think an honest appraisal of the current state of the evidence is that we simply do not know whether microcredit raises incomes and consumption.”
However, that may be irrelevant; the demand for microfinance services is high, and MFIs’ loan portfolios are becoming very large and profitable. Not-for-profit MFIs, such as Grameen Bank, are now self-sustaining while other smaller not-for-profits value transparency over the opacity of large transactions. Debate has sought to establish which whether for-profit or not-for-profit is the more effective and sustainable approach. This is also where the inherent value of microfinance lies; MFIs need very little ongoing public expenditure or resources where the sector is firmly established. Such demand, appeal and the increasing connectivity of global issues is driving social entrepreneurship around microfinance in places where you least expect it: China.
Microfinance in China is an extremely underdeveloped and overlooked sector that deserves more attention than it is getting. Poverty in China is often overshadowed by average annual GDP growth rates of 9%. According to World Bank and UN statistics, around 200 million Chinese live on less than US$1.25 a day. China’s financial and banking regulation makes it difficult for entrepreneurs and small business owners to access loan credit, especially in rural areas, where some 750 million people live. Whilst the government is geniunely supportive of microfinance efforts, a new peer-to-peer microfinancing platform, Wokai, is negotiating the Great Wall of Regulation (legally of course) and connecting international contributors with Chinese borrowers. The foundation of Wokai is accountability and transparency, as demanded by contributors. The platform is similar to that of Kiva and Vittana, but Wokai is the only one supporting sustainable livelihoods in China.
Some commentators on microfinance see P2P platforms on a precipice. It is predicted that by 2013, P2P lending volume will exceed US$ 5 billion. P2P microfinance was recognised in by Harvard Busness Review as one of the top 20 breakthrough ideas of 2009. P2P has global demand, contributor confidence because of its transparency and accountability measures, lender interest and technological support through web architecture. Ronald Ingram believes that official government sanction and endorsement of the P2P model could push an organisation over into the mass market.
In the context of the current crisis in the microfinance sector, are P2P platforms such as the one offered by Wokai, solutions to engendering a more participatory, transparent and accountable approach? I hope this article has asked more questions than answered, and I look forward to hearing your thoughts.
Brendan Rigby is co-founder of whydev.org, a space for students, graduates and young professionals working in international development.