Global Economic and Environment Issues

Review the articles, “Women and Financialization: Microcredit, Institutional Investors, and MFIs,” by Girón (2015), and “Microcredit: From Hope to Scepticism to Modest Hope,” by Berlage and Jasrotia (2015), which are required reading for this week. Respond to the following:Define microloans and determine how microloans can be utilized effectively to promote growth and development in a country? Specifically, what strategy would you propose to raise the effectiveness of microloans?Minimum 250 wordsMinimum 2 sources in APA format


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Microcredit: from hope to scepticism to
modest hope
After its introduction in the late 1980s and its fast expansion thereafter modern microfinance, and specifically microcredit, raised the hope that it could combine access to (semi-)
formal credit for the poor with financial sustainability of the new microfinance institutions, and that it would contribute to increased micro-entrepreneurial activity, consumer
welfare, and the empowerment of women. More recently scepticism about the operation of
microfinance institutions and their impact has arisen. Based on the literature, we discuss
the possibility of combining outreach to the poor with financial sustainability, microfinance
crises, and the findings of recent impact studies. Our conclusion is that microfinance is not
a panacea for development, but that it is a tool poor households can use in their fight for
Keywords: microcredit, outreach, financial sustainability, microcredit crisis, impact
Modern microfinance, and more specifically microcredit, was one of the most
remarkable innovations in development practice of the end of the 20th century.
Before 1980 in most low-income countries, banks and other formal financial institutions were hardly present in rural areas and they were not interested in providing
small loans to poor people or accepting their small savings. Small loans and savings
are administratively cumbersome and thus costly; moreover the recovery of small
loans was deemed problematic due to the lack of collateral. In many countries public
authorities had tried to remedy the problem by providing subsidized credit targeted
at poor households. But a fairly common view was that this policy had failed as
locally powerful persons had appropriated the subsidized credit and quite frequently
were refusing to repay their loans without being sanctioned. Frequently repayment
rates were as low as 40 per cent or even less (see references in Armendáriz de Aghion
and Morduch, 2005). In the absence of access to credit from formal financial institutions and of personal savings, poor people who needed credit to cope with negative
income shocks or to run small businesses had to request loans from relatives and
friends or from local moneylenders. Loans from relatives and friends are commonly
small; those from local moneylenders are costly with monthly interest rates of up to
10 per cent or even more.
Modern microcredit had its origins in the 1980s when in different parts of the
world new initiatives were taken to provide small loans to people without access
Lodewijk Berlage ( was a professor at KU Leuven, Belgium;
Namrata Vasudeo Jasrotia ( is a professor at XIDAS, Jabalpur, India.
Copyright © Practical Action Publishing, 2015,, ISSN: 1755-1978 (print) 1755-1986 (online)
Enterprise Development and Microfinance Vol. 26 No. 1
March 2015
to formal credit institutions. The best known of these was the Grameen Bank in
Bangladesh which after some preceding experimentation by its founder, Muhammad
Yunus, was formally set up as a bank in 1983 by a government ordinance. Elsewhere
in the world other microfinance initiatives were developed. In India the Mysore
Resettlement and Development Agency (MYRADA) started in 1987 with the
promotion of Credit Management Groups, precursors of the Self Help Groups, a
typically Indian vehicle for microcredit (Harper, 2002).
Since those first initiatives, microfinance institutions (MFIs) have proliferated all
over the world. Many microcredit initiatives were set up by NGOs as part of their
development activities. In time a number of these NGOs created separate entities
for their financial operations in the form of banks or, more commonly, non-bank
financial institutions. A number of these new institutions expanded their lending
quite rapidly. Frequently the change in legal status combined with the rise in
lending was linked with a gradual shift in objectives, from the pursuit of social goals
to that of profit. Some observers deplored this shift (see e.g. for India, Fisher and
Sriram, 2002).
Meanwhile microfinance became a hype. The first Microfinance Summit in 1997
set an objective of reaching 100 million households by 2005. At the 2006 Summit
this objective was raised to reaching 175 million households and getting 100 million
households out of poverty by 2015 (see How can the
microcredit hype be explained? The core explanation was the hope for a win–win
situation. On the one hand modern microcredit aimed at providing financial access
(‘inclusion’) for poor people who previously had been excluded from formal credit.
In this way poor borrowers would be able to start up or expand microfirms and this
would contribute to an increase in their households’ income and consumption. On
the other hand microcredit would be provided by financially sustainable institutions; that is, institutions that would be able to cover at least their operational costs,
but ultimately their full costs. Financial sustainability of the microcredit providers
required the introduction of innovations including, among others, joint liability
groups, strict repayment schedules, MFI agents visiting the debtors in their villages,
and the promise of new and eventually higher loans if debts were served.
In addition it was hoped that microfinance would contribute to economic growth
and poverty alleviation. For donors of development assistance these were very
attractive propositions as microfinance offered a channel to promote development
combined with the creation of sustainable financial institutions that would make
assistance superfluous.
But gradually doubts have arisen on whether microfinance was the panacea for
development it had been heralded to be. Some doubts were raised early on, for
example by Hulme and Mosley (1996) and Morduch (1999). Symptomatic of more
recent criticism are book titles such as What’s Wrong with Microfinance? (edited by
Dichter and Harper, 2007) and Why Doesn’t Microfinance Work? The Destructive Rise
of Local Neoliberalism (Bateman, 2010).
Scepticism has gone in different directions. We discuss three of them here. First
there were doubts on whether outreach to the poor could really be combined with
financial sustainability of MFIs. The suspicion was that financial sustainability was
March 2015
Enterprise Development and Microfinance Vol. 26 No. 1
possible only if subsidies were provided on a continuous basis or if not-so-poor
borrowers were accepted as clients. In this view, instead of a win–win situation there
was a trade-off between outreach to the poor and financial sustainability. A second
line of doubt is linked to the occurrence of microcredit crises. Most prominent was the
2010 crisis in Andhra Pradesh, the heartland of Indian microfinance, which resulted
from borrowers’ complaints about the coercive loan recovery practices of MFI agents
and group peers, of over-indebtedness of many borrowers, and of the allegedly high
cost of microcredit. A third line of doubt concerns the impact of microcredit. Recent
impact studies have raised doubts on the effects of microcredit on the welfare of the
borrowers, on microenterprise activity, and on the empowerment of women, and
hence on the capacity of microcredit to lift poor borrowers out of poverty.
In the following three sections we discuss each of these three topics. Our discussion
is based on a selective review of the literature; we do not pretend to be exhaustive
(which would be impossible in the framework of a short paper). Rather we select
studies in order to provide a broad picture of the results achieved and the problems
met by modern microfinance. Our discussion leads to the conclusion, formulated in
the final section, that microfinance is not the hoped-for panacea for development
and that its growth may present dangers both for its clients and for the sector as a
whole, but that nevertheless it can be a useful tool the world’s poor can use in their
fight for survival.
Outreach and financial sustainability
The major attraction of modern microfinance was the prospect that poor people
would be offered access to loans (and savings products) provided by formal or
semi-formal financially sustainable institutions. Financial sustainability can be
defined in terms of current operations: a financial institution is operationally
sustainable if its revenues are sufficient to cover its operating costs plus the costs
of default. An institution that is not operationally sustainable will need a neverending stream of grants or soft loans in order to survive. Full financial sustainability
covers operational sustainability plus independence from grants or subsidized credit
as sources of funds. Financial sustainability is not strictly necessary for an MFI’s
survival provided it has access to governments’ and aid donors’ grants or soft loans.
But as governments and donors can at any time stop their assistance, financial
sustainability is a reasonable objective.
The initial providers of microcredit focused on the provision of loans to formerly
non-bankable poor households. As microcredit expanded, increasingly MFIs were
set up as for-profit institutions independent from the initial providers, quite often
NGOs. Such MFIs stressed profits based on financial sustainability even if this
made it necessary to accept not-so-poor borrowers as customers. The rise of rapidly
growing for-profit MFIs in many countries suggests that this approach was increasingly dominating the microcredit movement.
Are outreach to the poor and financial sustainability compatible? Or conversely,
is there a trade-off between outreach and financial sustainability? The microcredit
movement started from the premise that the answer to the latter question was
Enterprise Development and Microfinance Vol. 26 No. 1
March 2015
negative, without empirical underpinning. Empirical studies on the existence of
a trade-off are based on data sets of MFIs in a number of different countries. Early
studies used data on a limited number of MFIs whereas more recent studies use large
data sets. Examples of the former were Mosley and Hulme (1998) and Morduch
(1999). On the basis of data for 13 MFIs Mosley and Hulme concluded that more
financially sustainable institutions had a stronger impact on recipients’ income
than less financially sustainable ones. Morduch (1999) found that most of the 72
microfinance programmes in his database had crossed the operational sustainability
threshold, but ‘many fewer’ were financially sustainable. The better performers on
financial sustainability in his sample were broad-based programmes that served a
wide range of clients. The few programmes that focused on ‘high-end’ clients did
not perform better than the other programmes. Morduch also remarked that his
study was based on rather big MFIs and that the many MFIs not in his data set were
probably performing worse in terms of financial sustainability.
Empirical studies went into a higher gear in 2007 with a paper by Cull et al.
(2007). This paper systematically analysed data for 124 MFIs in 49 countries. A
basic finding was that the relation between average loan size (standing for outreach
to the poor) and profitability was not statistically significant; that is, institutions
concentrating on poorer clients were not necessarily less profitable. But the authors
qualified this finding by other observations: for example, larger and older MFIs did
worse on outreach than smaller and younger ones, which suggests ‘mission drift’.
Later studies are based on databases of hundreds of MFIs, most but not all sourced
from the Microsoft Information Exchange (known as MIX Market). They come to
a range of conclusions, going from a negative link between outreach and profitability (e.g. Hermes et al., 2011) to absence of a link (e.g. Mersland and Strøm, 2010;
Quayes, 2011), and even the existence of a positive relation (e.g. Gutiérrez-Nieto et
al., 2009; Louis et al., 2013).
Moreover we should keep in mind that the studies we mentioned are based
on relatively big MFIs. Apart from them there are many more small MFIs. Casual
observation suggests that many of these smaller MFIs are hardly capable of covering
their operational costs and have to struggle for survival.
The evidence found in the literature suggests that lasting dependency of MFIs on
subsidized credit is not strictly necessary in order to reach poor borrowers. But many
MFIs remain dependent on financial assistance. Financial sustainability of MFIs does
not come automatically. MFIs pursuing both outreach and financial sustainability
need to establish an institutional and operational framework that contributes to a
positive balance of revenues and costs.
Micro-credit crises: a case study of Andhra Pradesh, India
In a number of countries microcredit institutions have been confronted with
crisis situations. Usually these followed years of rapid growth of the sector, with
steep increases in the number of clients and loans. Unwanted by-products of such
expansions were the rising indebtedness of MFIs’ clients linked with multiple loans,
a public outcry over alleged misdemeanours of MFI agents, and complaints about the
March 2015
Enterprise Development and Microfinance Vol. 26 No. 1
allegedly high cost of loans. Microcredit crises were observed in Morocco (starting in
2007), Andhra Pradesh, India (first in Krishna district in 2006, and then on a larger
scale in 2010), and in Nicaragua (the movement for non-payment, no pago, starting
in 2011). In Bangladesh in 2007–08 a crisis was averted by the concentrated action
of the big MFIs (see Chen and Rutherford, 2013). In this section we concentrate on
the crisis in Andhra Pradesh (AP), the heartland of Indian microfinance. We first
describe the events leading to the crisis and the measures taken by the state and
the union authorities. Subsequently we discuss some of the issues raised during the
The 2010 microcredit crisis in Andhra Pradesh
In India during the second half of the 1980s a number of NGOs started promoting
the creation of Self Help Groups (SHGs), consisting of 10 to 15 members, with the
objective of stimulating the economic activities of the members, among others, by
mutual savings and credit operations. SHGs could raise their lending by obtaining
loans from formal financial institutions. A crucial step was the introduction in 1992
by the National Bank for Agriculture and Rural Development (NABARD) of the Self
Help Group Bank Linkage Programme by which NABARD would refinance bank
loans to SHGs. This programme expanded quickly and was highly successful in
raising outreach to otherwise unreached people.
Separately from the SHG movement a number of MFIs were set up, usually by
consolidating the microfinance operations of NGOs in separate institutions such
as non-banking financial companies (NBFCs) which increasingly acted as for-profit
organizations. Many of these MFIs were using the joint-liability group model for
their lending. During the first decade of the present century a number of for-profit
MFIs expanded their operations very quickly, mainly financed by bank loans. The
frontrunner of this expansion was the South Indian state of Andhra Pradesh. In this
state the rapid growth was interrupted by a local crisis in Krishna District in 2006
when the District Collector shut a number of leading MFIs’ offices in the district
and instructed MFI borrowers not to repay their loans. This crisis was resolved with
support from the central bank, the Reserve Bank of India, and the growth of the
sector resumed with increased vigour. A symptom of this evolution was that in the
summer of 2010 a major MFI, SKS, went public. The initial public offering took place
at the end of July 2010 and was hailed as a massive financial success.
As early as June 2010, there had been warnings of actual default rates on microloans
being far higher than reported, as defaults were hidden by MFIs replacing older,
non-performing loans with new ones. Arunachalam (2011) notes that, starting in
August 2010, rising default rates and grievances about coercive recovery practices
were already tangible at field level. In late September and October 2010 accounts
of MFI borrowers in Andhra Pradesh committing suicide accumulated. In October
2010, the Chennai-based Centre for Micro Finance noted with alarm that in Andhra
Pradesh ‘the overall rate of indebtedness is extremely high’ (Johnson and Meka,
2010: 19). It reported that 84 per cent of households had two or more loans, while
58 per cent had four or more loans.
Enterprise Development and Microfinance Vol. 26 No. 1
March 2015
After reports in local newspapers of rapidly increasing violence (Nayar et al.,
2010), the Andhra Pradesh Government on 15 October passed an ordinance to
protect borrowers. As the reason for this ordinance it cited ‘usurious interest rates
and coercive means of recovery resulting in impoverishment and in some cases
leading to suicides’ (Government of Andhra Pradesh, 2010). The ordinance required
MFIs to state their interest rates clearly and register all recovery personnel in each
district they operated in. It forbade the charging of interest in excess of the principal
(a meaninglessly high limit) and the issuing of multiple loans to the same borrower.
Furthermore it specified that MFIs should ‘not deploy any agents for recovery nor
shall use any other coercive action’ (Government of Andhra Pradesh, 2010) and
threatened to imprison the managers in cases of breach.
The MFIs reacted by cutting interest rates, challenging the connection between
microloans and suicides, blaming a few rogue MFIs for abuses, and denouncing the
AP Government’s ordinance as a politically self-serving act to protect its own SHG
programme (Intellecap, 2010). But the crisis was a catastrophe for the microfinance
sector because of the damage to its reputation and the implicit signal it sent out
that borrowers would not be forced to repay their loans at any cost. Microfinance in
India went into protracted decline. In Andhra Pradesh almost all loans were written
off. Elsewhere in India the growth of MFIs came to an abrupt stop; only in 2012 did
MFIs start again to expand their operations.
In the meantime the Reserve Bank of India, India’s central bank, has issued
guidelines for NBFC-MFIs and has set up a licence system. The guidelines include
capital requirements and capping of annual interest rates at 10 to 12 per cent above
the MFI’s borrowing cost. A pending microfinance bill aims to ensure development
and orderly growth of the sector.
Issues raised by the 2010 microcredit crisis in Andhra Pradesh
The Andhra Pradesh microcredit crisis of 2010 and the events surrounding it raised
a number of wider issues. We briefly discuss three of them: excessive borrowing,
coercive loan recovery practices, and allegedly high interest rates. First excessive
borrowing became a problem in an environment where several MFIs were operating
in the same area and where individual MFIs were frantically trying to expand
their lending in order to raise their profits. This resulted in loans being pushed
on borrowers who did not really need them, putting an excessive burden on poor
debtors and delivering some of them back into the arms of local moneylenders.
A second problem was the coercive loan recovery practices on the part of joint
liability group peers and of MFI agents. Joint liability can be interpreted as an
expression of solidarity between group members. But it can also lead to excessive peer
pressure on debtors who are not c …
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