The current chairman of New Delhi-based Micro-Credit Ratings International Ltd,Malcolm Harper, who is also the former chairman of Basix, a major for-profit microfinance firm based in Hyderabad, took a break from this week’s Microfinance India conference to discuss his new book What’s Wrong With Microfinance? Much like the title, Harper, a leading international expert on enterprise development, is blunt about the fast-growing sector, saying it isn’t reaching the poorest, interest rates are too high and credit is not a human right.
He says most Indian firms aren’t ready for outside investment, and are opening the door for exploitation of the poor if they don’t choose their capital wisely. Edited excerpts:
So, what is wrong with microfinance?
(Nobel Prize winner and Grameen Bank founder) Muhammad Yunus says credit is a human right like it is water or shelter or something of that kind... There’s too much hype. It is nowhere near as important as primary health care, primary education, decent nutrition and decent infrastructure, decent government and security. Financial services are needed too, but they aren’t the be all and end all.
Macro vision: Malcolm Harper, author of What is Wrong with Microfinance?
What is right about it?
It provides formal financial services to hundreds of millions of people, in India alone, probably 100 million, that they otherwise wouldn’t get.
It is wonderful that in the space of 20-30 years—in India, really the last 10 years—formal financial services of a kind, and they aren’t that good but they are still better than nothing, have come to a quarter or one-third of the population that didn’t have them before.
What changes have you seen in the industry over the decades you’ve been in India?
Microfinance in this country is driven heavily by the existing commercial banks, largely public sector, that have been driven, cajoled, compelled, however you want to say it, by the National Bank for Agriculture and Rural Development largely. It has been largely a rural phenomenon—which isn’t the case in most countries—and provided largely through the movement toward women’s self-help groups, which is also unusual. It is approaching three million groups with, say, 15 people in each, but if (we) multiply that by households, there are a couple of million people.
What has changed is that new generation microfinance providers—Share (Society for Helping and Awakening the Poor through Education), SKS, Basix, Cashpor—have come up using the grameen model that has been so successful in Bangladesh. That has provided a very healthy competition to the self-help group movement. It means there are two main strands that mingle at the edges, the bank provided to the self-help groups and the MFI (microfinance institutions) provided to the self-help group, in the majority of cases through the self-help group.
Your thoughts on the Microfinance Bill?
I enormously respect your finance minister and I would offer him a job in England if he wanted one, but I think perhaps here (he) is oversimplifying. To suggest that dealing with the poor is the job of the not-for-profits and dealing with the better off is the job of the for-profits, it does rather oversimplify things.
I hope it doesn’t go through, though there is a great need for regulation.
The Bill opens the door for NGOs to accept deposits and offer savings. Are they ready?
A resounding no. They are very much not prepared. It alarms me that these very weak institutions, and by weak I mean managerially, weak operationally and weak financially, though often run by wonderful people who are thoroughly committed to bettering the world through work on sanitation, health care and so on. But, these people don’t know how to run a bank. For poor people to be allowed to deposit their savings in weak institutions is altogether wrong.
One of the reasons I enormously respect the major role the banks have played in Indian microfinance is that they are, for all their weaknesses, a safe place to put money.
The conference is full of investors and private equity money. Are these institutions prepared for their demands?
I don’t think most of them are, but there are a few. It is a small minority of larger, more established institutions who have already received a fair dosage of equity and loan capital. I find it rather sad that the majority of investors are from overseas. In microfinance, of all things, there is no need for foreign money and a lot (of) the conditions that that could bring down the road aren’t particularly attractive.
Are interest rates high?
Even though Indian microfinance has some of the lowest rates in the world, they are still too high. Interest rates in the 20-30-40% are too high, though they are coming down, partly thanks to competition.