The ills of microfinance

The conventional wisdom of according an unquestionable role to microfinance in poverty alleviation has recently been challenged partly because there is no strong empirical evidence to establish this simplistic claim. As the microfinance sector grew, it took a different economic trajectory with profiteering pursuits like a commercial bank rather than playing a visible role of financial intermediation between the rich and the poor.

When Grameen Bank in Bangladesh came under scrutiny in 2011 for charging exorbitant interest rates from the poor, it invited widespread criticism of the role of microfinance in poverty alleviation. Today, most microfinance initiatives have either opted for money-making businesses or are being cooped by commercial banks to penetrate what they call the untapped market for commercial banking.

The Bank of Punjab (BoP) recently announced to acquire a strategic stake in NRSP Microfinance Bank from the National Rural Support Programme (NRSP). NRSP Microfinance owns a 57 percent stake in the country’s fourth-largest provider of microcredit in terms of the number of active borrowers. It evolved from the savings of poor communities mobilised through their own village-based organisations. In the past, we had similar stories about the acquisition of microfinance banks.

In 2016, Habib Bank Limited (HBL) acquired 51 percent majority shareholding in the First Microfinance Bank Limited (FMFB), the oldest microfinance bank in Pakistan with presence in over 150 locations covering 66 districts. Both announcements came out on a Wednesday – albeit in different months of different years – but this coincidence makes this day significant in the history of ‘development’ in Pakistan.

Let me discuss why this day becomes significant for the practitioners of poverty alleviation. These people know that they have been preaching to the world that microfinance is one of the key instruments of poverty alleviation. Most of us were bombarded with jargon like microfinance as an instrument of financial and social intermediation, capitalism of the poor and a source of prosperity and entrepreneurship. These jargons were used by the practitioners of microfinance without much conceptual clarity about their meaning and manifestation in the real economic life of the poor.

The received wisdom from neoliberal literature on microfinance shaped part of this discourse and the approach of treating microfinance as one of the tools of poverty alleviation. The argument was simple: since conventional banks do not serve the poor, so microfinance provides them with an opportunity to access financial services.

For many years in Pakistan, we heard about the ugly role of traditional money lenders and the exploitation of the poor for the repayment of loans. We were also told that the poor are the best borrowers, and many microfinance institutions in Pakistan reported that their ratio of nonperforming loans (NPL) was less than one percent. This impressive record was then attributed to the willingness of the poor to borrow and timely return loans. But there was no substantial evidence of this oft-repeated attribution other than some anecdotal self-propelling stories of microfinance institutions.

When the microfinance sector was awash with money from social investors and poverty alleviation donors, the data on loan cycles and borrowers’ exit was never maintained or reported properly. The data about the number of loans or active borrowers was reported which did not provide adequate information about repeat loans and replenishing of default with new donor money.

The most misreported part was about the effective interest rate which, in most cases, was above 35 percent, making microfinance the most expensive financial service. Selected and concocted success stories worked as a smokescreen to hide the over-indebtedness of the poor and, in some cases, the misuse of the borrowed money. In the case of poor women borrowers, there are numerous unreported stories about the borrowed money being forcefully used by their husbands for personal expenses.

Poverty is less about the lack of access to basic services and more about the structural and institutional foundations of the political exclusion and economic marginalisation of a social class or a group of people. The solution to poverty does not lie in a technical programme of financial access with an exorbitant interest rate because in reality, poverty is rooted in the very foundations of such misplaced development priorities. Microfinance banks and institutions in Pakistan are governed by prudential regulations, and they function and behave like commercial banks albeit with much higher interest rates.

The crises of default and financial losses of microfinance institutions started to appear as a big threat to the industry during the last decade, but they were immediately bailed out through equity injection from public funds of poverty alleviation. There are two key concerns that have marred the reputation of the microfinance sector as a poverty alleviation instrument. First, there is no record of economic and income uplift of poor households through microfinance services. Second, faulty poverty targeting for profits has further marginalised the poor.

As a banking system, microfinance has gradually transformed from a community-based saving and internal lending practice to a commercially oriented profit-making venture. The first-ever community-led saving programme of Pakistan introduced by the Aga Khan Rural Support Program (AKRSP) was transformed into a separate microfinance entity in 2000 which ended up being acquired by HBL in 2016. The fate of NRSP Microfinance Bank followed suit to become subservient to the conventional banking regulations of the BoP.

Microfinance as a tool of poverty alleviation was an elitist concept that served the interest of a tiny elite of the development sector who relished on our ignorance of the sector. The microfinance sector suffered an elite capture dominated by a hazy world of opulence to deliver sermons of poverty alleviation. The hard-earned money of the poor through savings was stashed away to finance highly paid technical professionals to preach to the poor about poverty alleviation. The formulaic and formatted wisdom of highly paid technical professionals steered the journey of financial intermediation for profiteering rather than for poverty alleviation.

A day of lamentation for the microfinance industry as it goes down in the history of development as a prologue to profit ventures by commercial banks. The stories of mergers and acquisitions of the microfinance industry by commercial banks must not go without taking the industry elite to account for usurping the money of the poor and their failure to address the unending miseries of the poor.

For many decades, the neoliberal mantra of bringing capitalism to the poor through microfinance worked as an eyewash to hide contradictions at the core of the microfinance industry. There is a contradiction between microfinance as an extractive lending system and poverty with an impetuous urge of the poor to seek financial assistance for their survival. All those concocted success stories of microfinance leading to the prosperity of the poor were proven to be pieces of fiction woven together by gurus of conventional banking greed. This ‘banking greed’ is about minting money, and it acts like a rolling stone that gathers moss.

The writer is a social development and policy adviser, and a freelance columnist based in Islamabad.

He tweets @AmirHussain76

Email: ahnihal@yahoo.com