“Profiteers have hijacked the microfinance“; that is what a new book written by Hugh Sinclair alleges. I am not denying that many from this industry are making profit. However, time and again, i am tempted to ask the critics of microfinance if they can answer what would happen to microfinance clients in the absence of microfinance. Why do clients take loans from microfinance? Or in the absence of microfinance, will banks reach out to these low income clients?
Recently, CMF conducted a study in which 928 urban and semi-urban MFI clients were interviewed in five states of India. 49 % of clients reported that improving old business was one of the reasons for them to borrow from MFIs. We explored the usage of loans in relation to household engagement in enterprise. 84% of those clients with at least one form of enterprise (N=622) reported that they used the MFI loan for business purposes. Among the clients with no enterprise, 34% took MFI loans for household consumption, 25% for repaying old debt, 17% for education, and 16% for health.
Critics are aware that clients with entrepreneurial activity has high propensity to invest MFI loans in their enterprise. Why can’t these clients go to banks- critics might argue..! Our study found that 62% of the interviewed client households had at least one bank account. Despite the prevalence of formal banking amongst the clients, only 11% had EVER taken loans from banks. Primary reasons for not taking loans from banks given by bank account holders included a lack of need of type of credit that banks provide (30%), complicated application procedures (25%), and a lack of awareness about credit availability from banks(11%).
While these findings are insightful regarding the lack of formal micro-credit availability to households by banks in the sample areas, this finding more importantly underscores the dependence of these households on micro-credit availability from the MFI sector. Reasons such as complicated procedures and lack of awareness should not hinder the inclusion of these groups into the formal banking system. Till that happens, I wonder if we can actually say microfinance is doing no good to the poor…or microfinance is responsible for everything. Just a thought!