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The two colours of money

The two colours of money

Microfinance institutions (MFIs) are feeling the heat. Double-digit inflation has already cut into their thin operating margins, forcing them to either externalize the cost of lending or run into losses. If this isn’t enough, commercial banks have rushed into the hitherto exclusive microfinance territory that has, conservatively, an estimated size of 40,000 crore.

The Reserve Bank of India (RBI) had earlier opened microfinance doors to moneylenders by proposing an “interest cap" and “compulsory registration" to encourage competition. Branding them as loan sharks, MFIs have resented their entry in the sector. Regulating the informal lending sector was considered critical as about 30% of all rural household loans come from moneylenders.

While MFIs consider it as trespass, RBI is trying to be historically correct.

Had the Chettiars, south Indian moneylenders, not engaged in moneylending, modern Singapore would not have come into existence! But Muhammed Yunus and Indian MFIs are on the other side of history!

Aghast at the business strategies employed by a one-time charitable microlender that has become Mexico’s most profitable bank, Banco Compartamos, Yunus argues, “Microcredit was created to fight the moneylender, and not become one!" However, Compartamos’ Carlos Danel confirms that profits generated through commercial lending enable expansion of services to more borrowers than a donation- dependent charity.

The debate over capitalism’s incursion into microlending has the ring of an ideological squabble. Capitalism has proven irresistible as big lenders, investment bankers, venture capitalists and pension funds grab a piece of the action. Meanwhile, a central assumption on which both the profit seekers and idealists agree — that tiny loans can uplift the poor — is far from an established fact.

But there has been an overly enthusiastic rush to declare micro- lending a success, an optimism that facilitated Yunus’ winning the Nobel Peace Prize. In fact, most scholarly and journalistic accounts have been far from conclusive in declaring microlending successful in poverty alleviation and economic development.

We’re strikingly devoid of evidence that tiny amounts of credit lift up poor people, says Dean Karlan, an economist at Yale. Karlan and his fellow economist Jonathan Zinman tracked 325 people in cities such as Cape Town, who paid an annualized interest rate of 200% on loans from the open market, and found that borrowers were better off, had more food on the table and had better job retention.

Though it’s tough to draw broad conclusions, the study does point out the effectiveness of commercial credit. Cultures and economic structures do play a part, as do terms of credit. But a study published eight years ago by an Asian Development Bank economist, Brett Coleman, found no impact at all from small loans in 14 villages in Thailand.

The crux of the argument is that while economic theory suggests microlending has benefits, rigorous evidence that shows it does just doesn’t exist. Most of the evidence is at best anecdotal and impressionistic. If the idea of microfinance is a profit-making tool which ensures that poverty does not interfere with our normal life by burdening us with a crippling sense of guilt, then why should it concern the poor which ideological base credit eventually comes from?

Sudhirendar Sharma is a development analyst and chair of the Ecological Foundation. Comment at otherviews@livemint.com

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