Experts Warn Africa Must Learn from India’s Microfinance Problems

Wednesday, March 23, 2011

It has been lauded as one of the most promising ways of using the market to reduce poverty and boost economies in some of the world’s most deprived areas.

But in recent months the work of microfinance institutions (MFIs), which provide small loans to poor people with no access to traditional banking services, has come under scrutiny after a spate of suicides in the Indian province of Andhra Pradesh was linked to borrowers’ inability to repay their loans.

The news made international headlines and highlighted how accumulated debt can harm borrowers required to pay interest rates typically as high as 30%.

“Microcredit itself it has not really proved a panacea,” says Kamal Munir of the UK’s Cambridge Judge Business School, who has been monitoring the industry as an advisor to various international financial institutions.

“If anything, it has trapped a lot of people in a vicious debt cycle,” he adds, noting that many borrowers find they need to take extra loans to repay previous debts.

According to the Microfinance Information Exchange, a non-profit group that tracks the industry, there are eight million microfinance borrowers in Africa, in contrast to industry leader South Asia where there are more than 50 million.

A 2010 study focused on sub-Saharan Africa painted a mixed picture about the impact of microfinance on the lives of poor people in the region.

Researchers from the University of London’s Institute of Education (IOE) and the University of Johannesburg found that some microfinance projects have the potential to boost the quality of borrowers’ lives by increasing incomes and improving food security as well as access to health and housing.

But the authors of the report “What is the impact of microfinance on poor people?” also note that in some cases microfinance in Africa fails to improve the lives of deprived people, while sometimes it even makes them poorer.

Source: CNN (link opens in a new window)