Rob Katz

Will Bureaucrats Ruin Microfinance?

Microfinance India BannerA column in today’s New York Times suggests Indian microfinance institutions might soon be subject to regulations, such as interest rate caps, that would force them to dramatically reduce or even halt operations. Why must governments see the private sector only as a threat, and never as a partner? The article reports:

The government has abruptly shut down the branch offices of some microlenders, including Spandana, without respect for due process. There is talk of legally capping microfinance interest rates at levels–10 to 15 percent a year–that would put many microlenders out of business. Such regulations would drive the poor back to the far more expensive private moneylenders and also to the state government.

Why would the government want to shut down or constrain microfinance, one of the only proven development success stories of the past 30 years?

The motives behind this campaign are twofold. The state is not a neutral umpire but rather has its own ?self-help group? banking model, which lends at the micro level. Spandana and some of the other private microfinance groups are unwelcome competition. More generally, opposition to money lending has been frequent in the history of both India and the West. Not every loan will have a positive outcome, and it is easy to focus on the victims. Not all Indians have accepted the future of their country as an open commercial society with winners and losers.

My reaction to this is some heartfelt disbelief mixed with cynical acceptance. Of course the government would want to get in on the action–especially a government as historically corrupt and inept as India?s. (Its Doing Business ranking, which measures the regulatory costs of business, is 116 out of 155.) Is this the future of private sector-led development–success stories scale up to the point of financial sustainability, where they are seen as threats to bureaucrats and regulators, who then work to tax and constrain them?

I guess, when you get right down to it, that the environment in which a company operates is more important than ever. Microfinance institutions employ thousands of people who work to inject productive capital into the base of the pyramid. Why must governments see the private sector only as a threat, and never as a partner?