Udai Microfinance Project

From Udaimicrofin

Revision as of 17:35, 20 November 2006

This is the online collaboration space for the Udai microfinance project. We want to understand the intricacies of microfinance operations, especially in the context of India. There is much controversy surrounding microfinance, and the aim of this project is to scientifically analyze the strengths and weaknesses of microfinance, so that Udai can help MFIs improvise their processes to make a greater impact in reducing poverty and improving their efficiencies.

Microfinance: Pros and Cons

Pros

Poverty is modeled as a vicious cycle: A poor person or family remains poor because their poverty itself makes it difficult for them to avail the basic means of breaking out of this cycle of poverty. For example, education is one such method through which a poor person can improve his productivity and break the cycle, but he is unable to afford education because of his poverty. Similarly, poor health and malnutrition are other methods, but which are again unaffordable by the poor. Information and communication technologies are yet another means to increase awareness and improve business processes to help break out of this cycle, but these are not affordable by all. The key word here is affordable. Economics has evolved over the ages such that almost all services are now tradable through money; affordability means having access to capital to be able to buy these services. Which of these services should be categorized as tradable or as being a fundamental right of people, is a debatable issue. The proponents of microfinance are of the opinion that irrespective of what governments of different countries consider as fundamental rights or not, since today's economy is capital driven, the answer to poverty eradication has to lie in access to capital.

Microfinance refers to exactly this: Providing financial services for the poor, including savings, credit, insurance, and other financial instruments that mobilize capital and make it easier for the poor to afford other basic services.

Microfinance started as an experiment in the 1970s, and there are now innumerable stories of how it has helped the poor. In fact, it has been termed as the most important phenomenon since capitalism. The unique feature of microfinance as opposed to most other methods for poverty eradication, is that it is financially sustainable. This means that it can be scaled many times over to reach out to the 3 billion people of the world who constitute what is called the bottom of the pyramid. And if these success stories are not just spotty and anecdotal, then microfinance can actually help these 3 billion people break the cycle of poverty.

A talk by Vinod Khosla brings out the essence of microfinance very well: [1]

Cons

Microcredit is the most debated component of microfinance. A very comprehensive article by Thomas Dichter (author of Despite Good Intentions) talks about this in detail [2]. To summarize, microcredit is typically cited as fueling the entrepreneurial energies of the poor: Access to credit without any collateral helps the people start their own microenterprises, or scale their existing businesses, thus increasing the returns to a business activity. This article claims that most often microcredit is not used for entrepreneurial activities, but to just smoothen out economic ups and downs in a poor family. Even if it is used for businesses, the developmental impact it produces is questionable and it can be counter-productive sometimes. The aim of any such activity should be to cure the disease, and not just ease the pain. Some counter examples given by the author: