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Is microfinance a hero or villain?

For its supporters, microfinance is the magic bullet helping alleviate poverty while generating profits at the same time. But a series of high-profile mishaps around the globe, the industry's reputation is on the line. 

DOES MICROFINANCE HAVE A REPUTATION CHALLENGE?

However the strapline of a recent report into microfinance by Responsibility.org highlights the opportunity: “growth driven by vast market potential.”

" The dream of microfinance appeared to have turned into a nightmare, but scroll forward a few years and it's all good times."
Tom Cropper, Freelance social enterprise journalist based in the UK

It says the industry should expand by between 15 per cent and 20 per cent in 2016 with Asia providing the biggest fuel for expansion. That's good news. After a rocky few years, microfinance appears to be back on track.

The idea of microfinance originated with Bangladeshi Muhammad Yunus and Grameen bank which started providing small loans to poor individuals. Since then Yunus has garnered a Nobel prize and microfinance has been lauded for alleviating poverty, especially among women.

GLOBAL CRISIS

But in 2010, the industry hit a well-publicised rock. A series of farmer suicides in the Andhra Pradesh region of India were linked to micro loans and in particular the aggressive practices of collectors.

Investigations found microfinance providers operating in much the same way as loan sharks, demanding interest rates as high as 200 per cent APR and inflicting serious penalties on late payers.

The industry was in crisis. Profits fell. Investors fled. Both its major tenets had come into question. Not only had it failed some of its poorest clients but irresponsible lending and bad debts saw business take a major step back.

Even Yunus came under fire. The Bangladesh government launched a series of attempts to oust him from power after a Norwegian documentary made allegations of financial impropriety. These were eventually dismissed but the government was not deterred. They eventually got their wish, by citing he had passed the minimum retirement age.

The dream of microfinance appeared to have turned into a nightmare. However, scroll forward a few years and we see the world's major microfinance institution enjoying good times. SKS Microfinance, one of the largest in Bangladesh recently posted a 37 per cent increase in profits for the second quarter of 2015.

Europe has seen its inaugural Microfinance Day in Belgium as Marianne Thyssen, European Commissioner for Employment, Social Affairs, Skills and Labour Mobility promoted it as a key tool for generating jobs. Figures released at the event suggested microfinance had impacted on 250,000 jobs in Europe.

IS IT WORKING?

In Cambodia, microfinance is flourishing and has grown by 127 per cent between 2013 and 2014. All seems good. In a country in which financial inclusion is minimal to say the least, the ability of MFI's to offer access to capital to small lenders is providing critically important. But there're still problems.

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Photo credit: Juriah Mosin / Shutterstock.com

Poor people are struggling under a mountain of debt. A study by the Institute of Development identified a growing debt problem.

Some Cambodians, it said, had as many as six separate loans. A small majority, 51 per cent, had been forced to make sacrifices – eating lower quality food for example. The real truth of microfinance is far from ideal.

Elsewhere in the world, the problem is repeating. In South Africa, for example, where 96 per cent of microfinance loans are spent on consumerism, it is causing an increase in poverty. In Bangladesh, police broke up a ring of human organ donors who had been preying on indebted farmers who'd agreed to part with an organ in order to pay down some of their debts.

Jason Hickel of the London School of Economics, explains numerous studies into the impact of microfinance on poverty reveal its effect to be 'zero'.

“In fact, it turns out microfinance quite often ends up making poverty worse,” she says. “Most microcredit is used to fund consumption – basic necessities like food or schooling people are too poor to buy outright…. In such cases, borrowers don't generate any new income to repay their loans, so they end up wrapped in layers of debt.”

WHAT NEEDS TO BE DONE?

So what can be done? Some believe the answer lies in capping the number of loans which clients can take out. Others would regulate the microfinance providers more closely.

Tougher regulations on interest rates and collection practices might address some of the most negative headlines about the industry. Institutions charging high interest rates would struggle. The line between microfinance and loan sharking would become more defined, and struggling clients would find it easier to pay.

There are those who believe microfinance can still be a positive force for social good. Writing in the Huffington Post, Kadita Tshibaka of Opportunity International admitted some institutions had behaved irresponsibly, but argued it was unfair to paint the entire industry with the same brush.

According to the World Bank (2014), financial literacy education has a positive impact on development and poverty reduction where individuals have low levels of financial skills, education and income.

When delivered hand-in-hand with financial literacy education, poverty alleviation initiatives such as microfinance and cash transfer programs have a greater chance of achieving sustainable, long-term results.

For emerging economies, higher levels of financial literacy can help individuals, families and communities make an effective contribution to real economic growth and poverty reduction.

Financial literacy education is also crucial for developed economies – to help people save for a home, their children's education and retirement.

MoneyMinded, ANZ's Adult financial literacy program, aims to help individuals identify and work towards achieving their own goals and to take control of their futures.

Delivered in Australia, New Zealand and 23 markets across Asia and the Pacific, innovative techniques are used to illustrate effective money management behaviour and bring about a shift in the attitude, mindset and behaviour towards money.

ANZ is committed to improving financial literacy levels through the delivery of MoneyMinded, and to continue to promote financial inclusion where ANZ is represented.

Vosawale Tamani, ANZ Pacific

“We're committed to sustainability, not profitability,” she says. “Our clients are able to build viable businesses that grow, employ their neighbours, and strengthen their communities.”

The problem is, aside from a few isolated success stories, microfinance struggles to find evidence supporting its claims. Metrics are a problem. There are few, if any, reliable studies pointing to the success of microfinance and even its biggest supporters struggle to highlight concrete signs of success.

TIME FOR AN ALTERNATIVE

According to Hickel and other prominent microfinance critics, the true answer to poverty alleviation lies elsewhere. Increasingly they point to a simpler solution – give money to the poor.

Cash transfer programs are being used increasingly across the world and have has a promising impact on poverty reduction, improving diet and facilitating the launch of small business ventures.

Even so resistance to their use remains limited. “People are still stuck in the microfinance mentality,” Hickel says. “Nothing should be given away for free, they say, people must work to pay back what they owe - they need to take responsibility.

“This is an interesting response, because it shows microfinance isn't really about reducing poverty at all. It's ultimately about control; it's about imposing certain ideas of duty.”

Opponents of microfinance are not suggesting the concept should be banned entirely. There is a demand from businesses and individuals who would otherwise struggle to access credit. Even so, promoting microfinance as a tool for development is an increasingly difficult sell.

Proponents increasingly sound like zealots driven by a belief in the concept rather than the weight of data. The sector does have its place and there is a significant difference between the best and worst participants, but for true poverty alleviation, the world is looking elsewhere.

Tom Cropper is a freelance social enterprise journalist based in the UK

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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