What Went Wrong with Microfinance?

Wednesday, March 14, 2012

Long before “99%” became a symbol of Occupy Wall Street, the microfinance industry used the number to describe the share of its clients — poor entrepreneurs shunned by traditional banks — who repaid their micro-loans on time. It’s a number used less and less in microfinance these days — not because of Occupy Wall Street, but because many micro-borrowers are starting to default.

“One of the major issues we face in Lebanon is the problem of over-indebtedness,” said Youssef Fawaz, CEO of Al Majmoua, the leading nongovernmental microfinance organization in Lebanon. “We’re noticing that clients … drown themselves in debt by borrowing money from multiple institutions.”

Fawaz was among 23 microfinance professionals who gathered at Wharton late last year for the 3rd Annual Women’s World Banking Advanced Leadership Program, a collaboration between the Center for Microfinance Leadership of Women’s World Banking and Wharton Executive Education. Implemented in partnership with the MasterCard Foundation, the program brings together microfinance practitioners from around the world to study the latest thinking on business best practices, enhance their leadership skills and learn from each other.

Fawaz said over-indebtedness had become a problem in Lebanon because of the increased number of microcredit institutions, a lack of regulation and the absence of a strong credit bureau that would make it easier to identify clients who have multiple loans. “The information about whether [clients] have multiple loans or not is always hard to come by, so we have to guess,” Fawaz noted. Sometimes after a loan is given out, “suddenly [recipients] cannot meet their repayment. This is how you uncover that this person has had two, three, four loans at the same time.”

It’s a world away from three decades ago, when banks ignored the world’s poor, leaving many of them unable to borrow money at affordable rates. In the beginning, microfinance sought to alleviate poverty by giving out tiny loans to help people start small businesses. Popularized by Bangladeshi economist and Nobel Peace Prize laureate Muhammad Yunus and Grameen Bank, which he founded in 1983, the microfinance industry has since grown to hundreds of institutions serving more than 150 million borrowers worldwide.

Source: Time (link opens in a new window)

financial inclusion, microfinance