Tuesday, July 20, 2010

MICRO FINANCE – WHOM DO THEY REALLY BENEFIT, WHAT IS THE SOCIAL PERFORMANCE OF MICRO FINANCE INSTITUTIONS?



SKS MICROFINANCE LIMITED is hitting the market shortly. Many others in this sector have lined up for IPOs. The bubble is growing bigger each day. These companies are similar to the finance and leasing companies that mushroomed in the late seventies and early eighties and disappeared into thin air subsequently. More over, Micro financing started as a social cause enterprise is turning out to be blood-sucking business. The poorest of the poor and hapless sections of the society are being exploited. More and more entrepreneurs and PE funds are eager to do business in this segment.

The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. The borrowers pay exorbitant rate of interest. Most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions. The ultimate goal of micro finance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and health-care. How can they do that with that kind of interest structure?

Micro finance should not be viewed as a business venture where one can expect very high return on investments. Governmental and statutory regulations, including the imposition of an interest-rate ceiling, are bound to happen. This will adversely affect the operating results. More importantly, the sector, which sucks the blood of the poorest of the poor,does not deserve any support. The IPOs will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies millionaires. And the hapless borrowers continue to live in abject poverty. It is time that the regulators look into this ugly side of micro financing.

2 comments:

  1. Thanks you very much for your analysis and the comments you made about the microfinance sector and SKS IPO in general.
    I have few comments to make:
    - Something has happened in the past doesn't mean that it will be repeated in the future. A child doesn't know how to walk or run, but that doesn't mean that we should not make him learn this. So, in case of MFIs, a proper regulation and control is required.
    - Why the interest rate is high as you mentioned in your analysis. Have you ever thought of this? Who are the ones forcing MFIs to keep the interest rate at slightly highers level?
    - PE funds who are willing to invest in the sector are certainly doing this for their profit. But you suggest, where else the money come from?
    - How can you say that the situation is not better than the one with the moneylenders? Do you have any data to suggest that?
    - Moreover, do you have some data to show that the MFIs are not helping the poor come out of poverty and also not helping the build assets for future.

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  2. Please note that in the name of helping poor,they are exploiting the poor. MFIs should be run on the lines of NGO. Mohd. Yunus of Bangladesh has been very successful in this regard. For growth and sustainability profitability should be there, but should not be the prime motive. Although I do not have the data, I have interacted with beneficiaries who confessed that there is no difference between money lenders and the MFIs who are charging interst at/around 40%pa.a.

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