The microfinance movement began in south Asia when Muhammad Yunus started Grameen Bank in Bangladesh in the 1970’s. He was awarded a Nobel Prize for his efforts in helping bring women out of poverty in that country. It has been a successful experiment in social lending extolled by the likes of Bill Clinton, Kofi Annan and many other world leaders.
These days, however, microfinance is starting to lose its luster. In the last month there have been several news stories on the dark side of microfinace. There was this story on NPR, the New York Times and Vator.tv and many others. The basic problem is this. The interest rates charged by lenders in these countries are exorbitant and they are given to poor people who typically have little or no business experience. It has become a huge business, particularly in India, run by large corporations focused on short term financial results. Sounds like a recipe for disaster and that is what is happening. All this negative news prompted this response from Yunus in the New York Times last week.
In the Indian state of Andhra Pradesh, home to 75% of the microfinance companies in India, the state legislature has passed a new law that will likely send most microfinance companies out of business. Of course, like any industry there are many reputable companies that have been caught in the crossfire, and there have certainly been many success stories. But with many women being driven to suicide because of their mounting debts something had to be done. [Read more…]