The article in the url below discusses some of the problems that have resulted from the recent explosion in growth of the microfinance industry (Issues: Loans, p188). To some degree, microfinance is becoming a victim of its own success.
In general, the microfinance industry has been altered by the influx of for-profit firms that have learnt from successful nonprofits to develop a business model that relies on the high repayment rates that are typical within the sector. With profit as a stronger focus, however, these new microfinance lenders are increasing interest rates and introducing much more liberal criteria for extending credit.
The primary focus of this article, however, is on the continued success of traditional moneylenders in India (who charge much higher interest rates), who are flourishing in spite of the success of microfinance. It turns out that the source of the high repayment rates for microfinance is also the source of the microlenders’ ongoing success:
“Some microfinance borrowers say they need village moneylenders to help them pay their debts on time. … Peer pressure to pay back microfinance loans is intense, because microlenders almost always require borrowers to join small, tightknit groups. If one member defaults, none can get another loan. Microloans have a stellar repayment rate -- close to 100% -- and some analysts believe a hidden reason is the stopgap provided by moneylenders.”
Borrowers are willing to put up with higher interest rates in order to get easier access to credit and avoid the social ramifications of failing to meet their microfinance commitments:
“… the moneylenders are virtually indistinguishable from the microlenders. They distribute knock-off versions of the microlenders' passbooks. Some use the same weekly repayment structure and door-to-door service as the microlenders do. The difference, however, is that the moneylenders give loans faster, without asking the women to form groups and serve as each other's guarantors, as microfinance lenders do in order to ensure a higher repayment rate. They also charge significantly more than the four microlenders serving the neighborhood.”
Take care
DavidBill Werther & David Chandler
Strategic Corporate Social Responsibility
© Sage Publications, 2006
Microfinance grows along with rivals --- Small credit lines were supposed to trim use of high-interest loans in India's rural areas, but moneylenders flourish
By Ketaki Gokhale1386 words
16 December 2009
The Wall Street Journal Asia
8
http://online.wsj.com/article/SB126055117322287513.html
