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Atonement: Indian Microfinance Looks Inward

In its short existence Microfinance has already been both darling and devil for the corporate do-gooder. While this is a sector fraught with numerous tensions, it remains a viable and truly transformative option if channeled properly, writes Shrey Goyal

Shrey Goyal  16th Mar 2013

Axed employees of Grameen Bank hold a protest in front of its headquarters in Dhaka on 8 May, 2011 demanding their reinstatement

irst there was excitement: the model appealed in its very simplicity, and the possibilities of agency and social mobility it offered for the poorest sections of society. Lend directly to the poor, bypassing age-old barriers, and you would do great good. Mohammad Yunus, the Bangladeshi economist recognised as the developer of the concepts of microcredit and microfinance, received a Nobel prize, as did his bank, Grameen Bank, which was already feted worldwide as a shining example.

Then reality hit. As the model began to be replicated in other countries, including India, on a much-larger scale, and by lenders of varying motivation and scruple, reports began to show the numerous hurdles in implementation that had to be overcome before the noble intentions behind the concept could truly be achieved.

"The stories of 'Doing Good and Doing Well' of a model that was touted as a miraculous mechanism of reaching the poor, seemingly have started to dry out and are replaced by scathing details of wrongdoings by MFIs, client abuse, high profiteering, investor greed, manipulations within board rooms and are grabbing headlines,"— This is how Vipin Sharma of ACCESS Development Services describes the current situation in Microfinance India: State of the Sector Report 2012, or the SOS, as it is often referred to with an element of poetic justice. The SOS, now in its seventh edition, is seen as a valuable reference document not only for practitioners and researchers in the field, but for informing and influencing policy as well.

A woman holds her cell phone as she listens to U.S. President Bill Clinton speak at the U.S. Embassy on 20 March, 2000. Clinton praised the Grameen Bank microcredit program that allowed this woman to buy a phone which she in turn charges fellow villagers t

The first few SOS Reports published had a radically different tale to narrate. In 2006, by the time Prof. Muhammad Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize, microcredit was already touted to be the frontrunner in the race to eliminate global poverty. The bank Yunus built, with thousands of employees delivering useful services to millions of customers over the course of nearly 30 years, attracted special interest in India, the nation now projected as the world's largest market for microfinance.

However, the Grameen model was based on microfinance institutions (MFIs) being domestically funded, self-sufficient institutions owned mostly by the very poor they serve, and while being a "business" in the sense of being financially sustainable, the Grameen Bank only sought to earn enough to fund its own expansion without relying on philanthropic means, and never aimed to release rich dividends to investors.

A man who took a loan of Rs 20,000 from a micro-finance company to start his own tailoring shop, works in a slum area on the outskirts of Hyderabad on 15 March, 2011

Outside Bangladesh's borders, the microfinance story developed rather differently, with its own mythology forming around the notion that it could be a silver bullet that would "cure" poverty in a "profitable" manner. This attracted not only public investors but private ones seeking a "double bottom line" of socially responsible returns. Intermediaries including major investment banks like Citigroup and JP Morgan jumped in, finding investors and indulging in bonds, IPOs, ratings and such.

In India, absurd rates of growth were observed, and the achievements of this industry were exaggerated as a means to good publicity. Many MFIs reported annual growth rates of more than 100% for 5-10 consecutive years, and this boom culminated in SKS Microfinance, India's largest MFI, growing to nearly a billion dollars and debuting at the Bombay Stock Exchange in 2010. This both excited and worried the industry at large, since a public company is first obliged to make profits for shareholders, and thus may lose sight of its original aim — reducing poverty. This is uniquely true for Indian microfinance because unlike its counterparts in Bangladesh and most of the world, Indian MFIs are not issued banking licenses, and thus cannot be sustained on deposits collected from the public.

While being a “business” in the sense of being financially sustainable, the Grameen Bank only sought to earn enough to fund its own expansion without relying on philanthropic means

In the same year, the sector was rudely awakened from its state of "complacent arrogance," as SOS describes it, by the Andhra Pradesh government. The microfinance industry was being seen with an increasing amount of scepticism; reports of coercive tactics used for loan recovery began to surface, and were linked to suicides amongst the very  communities these lending corporations were meant to be helping. Some of these narratives may have been exaggerated, but most Indian microfinance success stories had been anecdotal in nature as well, and field studies based on randomised trials discredited the microcredit industry's claims regarding poverty alleviation. The pressure on employees to maintain a 99%+ repayment rate did not add well to the mix.

Queen Sofia of Spain being offered traditional cakes by a Bangladeshi woman during her visit to a microcredit site in Comilla, some 80 kilometers northwest of Dhaka on 15 February 2004, along with founder Professor Mohammad Yunus

As a couple of other large MFIs planned their own IPOs, something unthinkable happened in Andhra Pradesh, India's biggest market for microcredit. In a populist move by politicians, the state government stepped in with an ordinance that took this sector by the neck, effectively allowing borrowers not to repay their loans, and curbing any further microlending. While the overheated AP turf could always have imploded by itself, the government shut down the industry overnight, bringing down repayments from 99% to 15-20%. Lending institutions started defaulting on their own loans from mainstream banks, and millions of poor borrowers who were accorded the status of "defaulters" by microfinance credit bureaus shall face unfavourable terms and possibly rejection when applying for loans in the future. A problem that needed to be treated with a scalpel was attacked with an axe.

The Andhra shakeup, tyrannical as it was, did lead to churn in the sector. The past two years have seen the sector take a hard look within itself and attempt to restore some of its lost dignity. This is reflected in the fact that the SOS only carried a single chapter on the mission of microfinance and social performance management (SPM) until last year. SOS 2011 was accompanied by a completely new publication from ACCESS, The Social Performance Report, which examined corrective measures by the microfinance industry in a post-AP-ordinance India, and attempted to bolster its public image.

Post-Andhra is a different world indeed, for MFIs as well as borrowers, who would have numbered beyond 100 million by now had the pre-Andhra momentum been sustained. While SOS 2011 was all about the crisis and its impact, the 2012 report talks about promising developments for the clients beyond lip service. Microfinance in India is finally moving beyond core microcredit and now provides a variety of products and services in new areas such as savings, healthcare and sanitation, microinsurance, and even housing, and financial literacy efforts are gaining ground as well.

he report also tries to make a strong link with the public policy environment in India and provides inputs for in-depth understanding of the operational climate for microfinance and its relation with the government's flagship schemes and efforts for poverty alleviation, hinting that the Reserve Bank of India may be considering microfinance as an integral part of its mechanisms for financial inclusion. Besides well-researched and well-analysed commentary on the industry, the report also reviews various research studies and writings by microfinance experts and stakeholders globally, most notably the Banana Skin Survey 2012. SOS also identifies existing knowledge gaps that require further research, statistical efforts, and empirical backing.

Vendors use solar powered lights at an open air evening market in Ahmedabad on 10 September, 2009.

The Social Performance Report (SPR) thus picks up on one of these gaps. While many Indian MFIs had publicly claimed having a double bottom line, they had never really been held accountable on an objective basis. SPR thus documents the sector's rediscovered emphasis on social impact, client protection, and is an account of the cleansing effort by Indian microfinance to go back to its roots in eliminating poverty and empowerment of low-income clients.

The Report rejoices in announcing "Finally customers at the core," and tries to justify this using impact data. MFIs have participated by painstakingly collecting and sharing client data, partly to defend investors and funders, and partly due to pressure from RBI. That said, only about 23% Indian MFIs registered with the Micro Finance Information Exchange (MIX) submitted the required data, possibly due to a lack of robust Management Information Systems. This data is fed into frameworks and tools which spit out indices and measures of social performance. For example, the Grameen Foundation's Progress out of Poverty Index (PPI) uses ten non-financial indicators such as family size, the number of children attending school, the type of housing, and access to drinking water and serves as a baseline from which client movement out of poverty is measured.

Nevertheless, social metrics still remain poorly defined, and even if frameworks like PPI become ubiquitous and see vast improvements, the benchmarks still remain contentious. When a metric as simple as the Poverty Line has been defined by various groups at such different levels, doing the same in the presence of profiteering opportunities and vested interests is a challenging exercise.

Muhammad Yunus (centre), Grameen Bank representative Mosammat Taslima Begum and chairman of the Norwegian Nobel PeacePrize Committee, Ole Danbolt Mjoes (left) enjoy a dance performance during an award ceremony at Oslo Town Hall on 10 December 2006

In any case, MFIs are finally moving beyond the business of finance to improving the quality of life and wellbeing for the poor. A prominent funder now refuses to support institutions where the CEO earns more than 20 times a field officer. Discussions around SPM are leading to scrutiny of the social promise made by MFI founders and promoters in objective terms.

Both the reports point to the maturity of the sector, as evidenced by a scientific and rigorous approach replacing the hoopla of yesterday and an increased emphasis on accountability. Gaps in technology still need to be covered, and the sector will have to grapple with issues regarding balance in social responsibility and profit-making for a long time. Girija Srinivasan ends the Social Performance Report with a quote by the father of modern economics himself, reminding the sector of its roots at the confluence of business and social welfare.

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

— Adam Smith

Shrey Goyal is a part of the Grameen Creative Lab team building the social business movement in India. The article expresses the authors' personal views and does not represent the opinions of any affiliate organisation. The author can be found on twitter at @ShreyGoyal and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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