Micro Finance - A perspective on what went wrong

                          

                                Micro Finance; trusting in women, their hard work and integrity

This afternoon we had Tony Sheldon, Executive Director, Yale University, visit SELCO. He is an expert on Micro Finance and Social Entrepreneurship and has made SELCO a case study for sustainable social entrepreneurship at Yale. 

In under an hour, I got this brilliant perspective of what happened to the world of Micro Finance globally and especially in Andhra Pradesh. This was a question which was bothering me for quite a while now, and the story was fascinating enough for me to want to put in here. 

After all, we saw Mohammud Yunus get the Nobel peace Prize for his work in Micro Finance, and there were so many wonderful success stories in the world of micro finance in Hyderabad itself. They were doing so much good work, helping so many of the poor, and suddenly it all changed......to the extent that micro finance became a bad word. It really bothered me.

For those who are not too familiar, MFIs, micro finance institutions are private sector organizations that lend , typically small sums of money to the very poor who do not otherwise have access to the formal banking and credit industry. There are different models of lending, some based only on productive enterprise, like micro and mini businesses, some for life cycle needs like weddings, funerals, education, sickness and so on. Some models lent to individuals, some only to groups. Some did it at 20% pa interest, and some even at 100% pa, but the basis was that it was a tool to reduce poverty.

In 1990s and 2000s this became an industry, when it was realized that one could lend to the poor profitably, you can do good and do well at the same time. Now this is a positive thing, but when the focus shifted from the doing good to expecting hockey stick growth in terms of financial returns, when it moved to making money, huge money off the poor is when trouble started to brew.

This company called Compartamos  ('lets share' in Spanish) in Mexico was doing so well in micro finance, that it was showing a return on equity of 50% and more, and this attracted the really high stake financial global investors. They did the first IPO of an MFI, and they did so brilliantly well, made so much money at the IPO, that the big investors now started to look for potential MFI markets, typically developing countries, and that’s how India and AP came into the big league in Micro Finance. Especially SKS which had over a million clients. Lots of money got pumped in, lots of people got very rich and the industry hadn’t yet learnt how to handle it, and that’s where the trouble started. The market got quickly saturated,  as the focus stayed within AP and the same people were given multiple loans, murky things started to happen, and the State Government and the Press came down on the MFIs. Regulations were strapped in and the industry collapsed. Pretty much like the mortgage bubble that hit the US economy a few years ago. 

Apparently, this had global impact, with the MFI industry in Nicaragua, Bolivia, Bosnia and several other countries, all also imploding. There are books written on it, but that's the story in a nutshell.

Luckily the industry is on a recovery path, and we're back to seeing a whole lot of micro finance institutions, but long as the people behind it keep the focus on poverty alleviation and not high stake financial returns, they can still do both, do good and do well. Lets hope they do.