Breaking the Myths of Microfinance

Tuesday, August 4, 2015

A poor woman approaches a microfinance lender along with a couple of her neighbours and friends.

She gets the loan, paying interest rates of between 25 and 40 per cent per annum, turns entrepreneur, gets out of the poverty cycle, repays the money and lives happily ever after. That is the narrative that one usually hears from microfinance lenders.

Tara Thiagarajan, Chairperson, Madura Micro Finance, debunks that script and points out wryly, “no one makes money borrowing at that rate.”

Then taking a swipe at the media, she remarks with a smile that the media want to hear stories of this one borrower whose life has been transformed by microfinance. Even other MFIs and their investors believed in this narrative. Reality is different and does not necessarily follow this fairy tale script, she says.

Challenging the assumption that the poor borrower automatically turns entrepreneurial with a microfinance loan, she draws a distinction between borrowing for sustenance and livelihood and borrowing for building enterprises and capacity.

Low numerical literacy

When she ran a survey some years ago, she found that most borrowers did not understand either the interest calculation method or the amount they were paying as interest. Numerical literacy was low and many lenders just preyed on this lack of understanding, according to her.

Source: The Hindu Business Line (link opens in a new window)

lending, microfinance