Microfinance schemes are under fire as a new law looks to regulate the sector in the Indian state of Andhra Pradesh
Microfinance has had a star billing as one of the most popular development policies of the last two decades. But crisis has struck the Indian state of Andhra Pradesh, the hub of the country's multibillion dollar microfinance sector. Events are being followed closely after the state legislature passed a controversial law to regulate microfinance firms.
To critics, the law represents a disastrous politicisation of the microfinance industry, which will effectively authorise mass defaults and could cripple the sector; already, collections of dues has fallen to below 10%.
To backers of the law, it's an attempt to rein back the worst excesses of an industry which, it is claimed, is charging exorbitant interest and is responsible for an increasing number of suicides because of heavy-handed debt collection methods.
Even Muhammad Yunus, a pioneer of microfinance and who won the Nobel Prize for his efforts to help the poor has weighed, in attacking companies for "misusing and abusing" his concept.
A number of senior economic professors at US universities have joined the argument, writing in the Financial Times to defend the reputation of microfinance and criticising the government intervention, which they argue could lead to a collapse of the sector with devastating consequences both for the poor and for the Indian banking system.
They acknowledge that some reform of the sector may be needed ? in particular better screening of those seeking loans ? but defend the high interest rates (typically well over 20%) as substantially below private moneylenders to the poor, who can charge up to 120%.
Central to the crisis in Andhra Pradesh are institutions such as SKS, which started out as an NGO and transformed itself into a profit-making company that launched on the Mumbai stock exchange. In recent days, SKS's share price has halved as confidence has been shaken.
Microfinance was hailed as a saviour to the poor, bringing financial services such as loans and savings within the reach of very poor communities.
Few ideas in development have had such a dramatic and widespread appeal among donors and across the developing world. It is estimated that there are now something in the region of 650m client accounts at more than 3,000 institutions. The average loan is $250. The vast bulk are in India (where it is estimated that there are about 180 million clients). But microfinance initiatives are spreading rapidly across many countries in Africa.
There have been attempts in recent years to clarify the key principles of microfinance (of which microcredit is one element). A central aim is that it aims to offer financial services, such as savings and small loans, to the poor. Usually, the majority of borrowers are women. Schemes are usually accompanied by strict rules on attendance, repayment and building group trust.
Although, microfinance has won enthusiastic backing, it has also had its critics, who argue that it's a strategy that manages poverty rather than transforming it. Evidence that it reduces poverty is less substantial than one might imagine, given the idea's popularity.
Anecdotal evidence of individual lives helped has played a big part in its appeal to donors. Another criticism sees the insistence that the small loans are only used for new enterprises as unwarranted interference, when often the poor need loans to cover health and educational expenses.
The far right War crimes Australia Weir Executive pay and bonuses Entertainment
No comments:
Post a Comment