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Monday 1 September  
Bidi, a Indian recipient of microcredit, is now deep in debt
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The Hague, Netherlands
The Hague, Netherlands

RNW’s microfinance debate: Controversy is inevitable

Published on : 24 January 2010 - 10:00am | By Vanessa Mock
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A way out of poverty or a gold rush for lenders? As microfinancing booms around the globe, international experts meeting in The Hague on Monday will warn about the pitfalls of financing the world’s poorest. The debate, organised by Radio Netherlands Worldwide, will focus on the key challenges facing microfinance institutions (MFIs) amid growing questions over whether they have a real impact in reducing poverty.

Watch our preview video for a taste of RNW's upcoming microfinance reports:

“The world’s poor deserve the best. That’s why we have to take a sharp look at how best to help them get what they need,” says Klaas Molenaar, the President of the European Microfinance Network, who also advises MFIs around the globe.

Mr Molenaar will be part of an international panel, scheduled after the key speeches given by Princess Máxima of the Netherlands, who is the United Nation’s special advisor on microfinance, and Dutch Development Minister Bert Koenders. The interactive event will hone in on divisions over the sector that is now home to 10,000 institutions and which has extended loans to over 150 million people. Microfinance offers poor people access to basic financial services, such as loans to help them build businesses and assets.

Controversy is inevitable given the huge sweep and complexity of this sector, says Mr Molenaar, who here sets out the four main opposing viewpoints that will be used as the basis for Monday’s debate.

  • Viewpoint 1: It’s neither the borrower nor society who profit from microfinance, but MFIs.

Klaas Molenaar: That’s true insofar as MFIs do benefit, but that’s not because they want to make a lot of money, but because they need to remain sustainable in order to continue reaching out to a large number of people. Society as a whole probably benefits from MFIs too. But it’s a chicken and egg situation, because the client also has to be able to keep going – if he or she cannot repay the loan, then the MFI will not be sustainable either.

  • Viewpoint 2: There is no proof that microfinance is beneficial in the long term.

KM: That depends on how you define ‘beneficial’. For social empowerment, microfinance works, it gets people involved in society. But if you look at the figures, it’s true that only a very limited number of small enterprises have sprung up. Microfinance is not the right tool for innovation and economic development. Small entrepreneurs need other conditions, they need longer loans, other cost structures. And they need account managers that think with them.

But there’s a much bigger question here. A woman in India once told me she wanted to buy a cow. I could look at this very coldly, and argue that this won’t help boost the economy. But she told me: “I need this because I don’t want to remain a coolie for the rest of my life.” That kind of thing stops you in your tracks. Once you talk to clients, you see how they struggle, but also that they have an enormous drive to continue. That’s why we have to do our best to give them the help they deserve. Or else people will lose interest in microfinance.

  • Viewpoint 3: Without financial literacy programmes, the microfinance sector will not survive.

KM: I would agree with this. You need people to tell you what they really need. You have to have outspoken clients so that your products continue to evolve. If your clients just follow you blindly, then you’ll end up selling a product that will not be relevant to them any more and it won’t sell. So if I were a manager of a financial institution, I would work hard to make my clients assertive.

  • Viewpoint 4: In conflict zones, microfinance is not the answer.

KM: Building up an economy in a conflict or post-conflict zone is very hard. Look at what’s happening in Afghanistan, where there are 320,000 MFI borrowers, which is very impressive in just five years. That means that these people have found something to do with that money - in many cases it’s probably helped them to lay down their weapons.

But you have to ask yourself if it’s realistic to expect people in a conflict zone to enter into economic activities that are sustainable, such as buying, selling and operating in a market place – and that’s the goal of microfinance. I personally would never invest in such an area as an entrepreneur, it would be too risky. Others do, they see opportunities. But don’t expect too much from them.

Discussion

Raj 29 January 2010 - 1:14am / The Netherlands

At the moment most of the wealthy people are in the West. The money and the money lenders are also here. In the recent past period the West had not a very good record in the thirth world. Lets say"blood-sucking". It was and is, bring nothing and take everything. Virtually give with the left hand and take it all with the right hand. The wealthy people of the thirth world are also educated now at Oxford. You can't exploit this group then you have to seek for another group. Yes the poor. Small profit but in large/huge amount. The West always demands something in return. The West has to make a switch in their brains, tickers and thoughts. Wake up and become a human.

Vera Gottlieb 24 January 2010 - 10:15pm / Germany

Has it ever occured to Jasmin to take a look at the colour of the skin of poor people? For ever and ever it has been the white, christian, civilized West that has exploited other cultures for the benefit of the self. It is the caucasian race that is the shit disturber par excellence.

jasmin 25 January 2010 - 5:50am / India

Vera, colour of skin has nothing to do with poverty. We have dark skinned people who are stinking rich and fair skinned-very poor. Whites of Europe did exploit people of colour, at one time, but now their own people are exploiting them. The only colour that matters is -grey matter- how you use your intelligence to enhance your position in the society. Lots of incentives are given to poor people, in India, but as I stated in my earlier post, some people make poor choices and land in debt. I work with below poverty line kids and adults, in the rural Punjab, as a part of my job and my post is the inference of that work.

Vera Gottlieb 24 January 2010 - 10:12pm / Germany

God damn it! Must everything that might help poor people be run into the ground? Is micro-finance not working because those who should NOT be involved (large banks come to mind) can't make enough money off of it? The real motive for seeing to it that it doesn't work has to be...no more abundant cheap labour to exploit.

jasmin 25 January 2010 - 2:31pm

It may sound harsh or politically incorrect but the truth is that the Poor are poor because of their poor priorities.The main reasons of poverty are:1.Unplanned large families-Much of the resources earned are spent in bringing up the large family and treating the sick members 2. Illiteracy- It means less choice of a better and well-paid job 3. Addictions-Menfolk drown their frustrations in alcohol and drugs, which means less money for the family 4. No future planning-They live for the day and either they don't save for the rainy day or they don't have enough money to save. 5.Competing with the better placed relatives/friends-Especially common in India. For some people, it is imperative to have TV with cable connection, a motorised vehicle, have gold ornaments and expensive clothes, spend lavishly on marriages and give dowry to daughters. Nothing wrong in it but the fact that they do not have the resources for these simple luxuries, so they borrow money for this from the money-lenders on huge interests, or now from microfinanciers! Since they cannot earn enough to repay and bring up the family as well, they are laden under heavy debt. Take the case of Bidi from India:she used the money from moneylender to give dowry to her daughter, which is like throwing money into the black hole, which means no returns from this 'investment'..Had she used that money for some business, she would have been able to earn some amount to repay the debt.The cow she bought from micro credit died, Now who is at fault-the MFIs or the borrower? We cannot blame MFIs for the wrong investments of the borrowers.The borrowers should have the wisdom and long-term planning about investments and returns. My suggestion is that the borrowers should be first counselled by the MFIs about the local businesses, which give them good return and a word of strict caution that these credits are not to be used to buy items of luxury for home use or giving dowry to daughters, as then this money will be lost forever, and the basic concept of micro credit will be lost.

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