The theory behind microfinance is that if you empower poor people with access to financial services, they will be able to lift themselves out of poverty, improve the economic condition of their community and reach their full potential in life. This theory has had considerable success throughout the world, and there is ample proof that microfinance is an effective tool in bringing about economic parity. However, as can be the case with all successes, the light can go dark and the original mission can get lost. This is what happened in India.

Microcredit Becomes a Death Sentence

The microfinance industry was flourishing in India, a country besieged by poverty. One of the most popular programs was microcredit. How does it work? As an example, let’s take a poor woman living in a rural Sharone perlstein::India - poor childrenarea who is struggling to keep her small business alive and make ends meet. She applies for a small loan of around $200 and receives it. She uses this money to build up her inventory or assets which she then turns into marketable products or services. One would imagine that selling these products or services would then allow her to (1) pay back the loan and (2) improve her financial condition. In theory, this should work perfectly, but, when the loan carries an interest rate of 24% – 30%, our poor small business owner, who is barely able to get by, is now stuck with a loan that she cannot repay. So, what does she do? Usually, the borrower accesses another loan to make payments on the first loan, and then a third and a forth until no more loans are available. At this point, her debt has become insurmountable and the credit collectors are knocking at her door. The great pressure and intense threats from collectors coupled with the public humiliation and true inability to pay have driven borrowers, predominantly women, to take extreme measures and even take their own lives.

How to Correct the System without Erasing the Potential

As a result of the grave consequences of predatory lending practices, the Indian government has passed a law that limits the local activity of microfinance companies to an extent that makes it practically impossible for them to conduct business. In addition, local politicians have been encouraging borrowers not to pay back their loans even if they can, leading to a significant decline in debt closure.

“ONE WOULD IMAGINE THAT SELLING THESE PRODUCTS OR SERVICES WOULD THEN ALLOW HER TO 1: PAY BACK THE LOAN AND 2: IMPROVE HER FINANCIAL CONDITION. IN THEORY, THIS SHOULD WORK PERFECTLY…”

Nevertheless, long-time proponents of the microfinancial system will not be discouraged. While acknowledging these serious offenses, they continue to advocate for microfinance and to point out its benefits and potential when carried out responsibly. Without microcredit, the poor population of India will continue to be disenfranchised not only from loans, but also checking and savings account, insurance, and other financial services that are freely available to the majority of the world. The challenge is how to deliver financially empowering assets that do not turn the beneficiary into a victim.

(Source:http://www.npr.org/2010/12/31/132497267/indias-poor-reel-under-microfinance-debt-burden)

 


Microfinance fails to deliver on its Promise to… by sharone-perlstein

Summary
The Dark Side of Microfinance
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The Dark Side of Microfinance
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Microfinance, one of the most promising tools of economic parity, became instead a tool of oppression for the poor of India, resulting in debt and suicide.
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Sharone perlstein
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