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 
area 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
Microcredit is the only solution to the vulnerable position of women in India. This improves their financial status. women become more independent, start their own businesses with the help of these loans
A very useful article indeed.
Author has very critically examined all the aspects of micro finance system.
The Dark Side of Microfinance is really suffers the poor nation country like sudan.It distroyed these countries by micro credit. Interest rate is 30 to 40 percent. Most of the villeger are homless for micro credit.
India needs help
Nice post. Want to hear more from you soon.
Microfinancing seems like a great idea, if only the interest rates weren’t so high. It could help a lot of poor people all over the world.
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I completely support the idea of giving people in poverty the opportunity to financially uplift themselves
Lending unsecured money at high interest rates to poor people with no collateral who are very vulnerable to day to day problems will be fraught with problems. But that does not mean that people should stop providing the funds. Instead they should put the funds in microfinance structures that can still ensure the money gets were it is needed, through structures that can ensure this happens in a secure manner all round….
This article really reveals why poor are getting poore in the developing countries. The loan is suppose to be the reliance of the poor. Alas! the loan has turn to a tool that hammer the poor further into poverty. Government should help in handling this situation. I suggest Islamic banking which did not permit loan as the panacea to the problem
Micro finance is a very good matter for the village people.But some people use it badly.They took a high interest of the poor people.Some times it is really affected them very much.
this is terrible, Micro-finance industry has always and will continue to be helpful to the Indians, because many people have benefited from it, and it has brought so many people out of poverty,people will suffer without it, something has to be done as quick as possible.
In my opinion microcredits are very heavy for people in need. Banks are the most corrupt and fraudulent system as they give people the least low-interest loans they receive twice as much.
In my opinion microcredits are very heavy for people in need. Banks are the most corrupt and fraudulent system as they give people the least low-interest loans they receive twice as much.
Microfinance and microcredit is a fascinating topic and I love this article and the way it is written, very interesting!
Basically Microcredit is good if people are proper use of it.
But unfortunately people of our culture waste of their money. They don’t have good idea how to use those small amount of money. NGO or microfinance industry are never gives a good guide line them.
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Micro finance is a very good matter for the village people.But some people use it badly.They took a high interest of the poor people.Some times it is really affected them very much.
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