Articles, Debate

Financing the future?

9914820-background-concept-wordcloud-illustration-of-microfinance-glowing-lightThere is a startling similarity – frankly, an alarming one! – between the subprime borrowers and the clients of micro financing institutions functioning across the developing world.

The clients in both situations had and have little to no collateral, there are practically no means of verifying their income, they are the socio-economic segment most vulnerable to external shocks and have little to no understanding of financial services, products and institutions.

Are we ramming into another subprime crisis with our eyes wide shut? Aren’t the poor poor enough? Do they need to be pushed into the same credit whirlpool we’re still reeling from?

To quote Pancho Otero, head of IPM (Micro-Enterprise Policy Institute), “Micro Credit is the most powerful tool that has ever been invented to eradicate poverty. With this strategy well implanted, the poverty of a country will be eradicated.”

Almost a miracle cure to global poverty, wouldn’t you say? But he has a point. With its relatively straight forward strategy, standardized simple operating model and focus on community development through community responsibility, the numbers are overwhelmingly positive. This is no hand out, no sense of degradation from living on the receiving end of charity.

The skeptics among us wonder about the flip side.

Karla Brom, an expert on risk management, corporate governance and an international banking consultant, defines Micro Financing more precisely as “… the provision of financial services and products to the poor and unbanked.” She stresses the ‘unbanked’ and explains the micro financial product range as Loans, Savings, Micro Insurance and Remittances.

Perhaps this isn’t quite the flip side but it is definitely not as exuberant a proclamation about the messianic prowess of Micro Financing. This is mainly because of the many socio cultural hidden costs. There have been reported increases in domestic violence and abuse, farmer suicides because of an inability to repay loans, misuse of loan money, increased gender inequalities, etc. Truthfully, there is no means of quantifying the social ramifications of micro financing institutions.

But the fact remains that Micro Financing is a market based solution to eradicate poverty and has seen a whopping 154% growth in the past decade. The sector is worth billions and has seen widespread success in a diversity of populations and markets.

Pancho Otero stresses that a Micro Finance Institution’s primary goal is to improve the level of income of those who do not have access to working capital. A means for poverty mitigation or irradication. He condemns using micro-credit as bait for other humanitarian objectives like education or health care. Yet, as Karla Brom points out, without humanitarian objectives working simultaneously with Micro Financing Institutions the point of having more income is lost when there are no developmental initiatives for clients to invest in or take advantage of.

Can we take sides? Can we afford to?

Watch the videos and post a thought!

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