The objective of financial inclusion is to help people access financial resources to live better lives. This could be to increase their income, create jobs, finance ventures, improve farms, fund self-help groups etc. We see that the reasons are diverse, but the objective is to help improve lives. Access to financial tools has steadily been increasing and continues to increase. Has this translated into the above? Does microfinance do that? From the success of Grameen bank, we know that some of these objectives are met. Grameen bank has tangible improved the lives of people in the community. However, is this a universal outcome? Have all microfinancial institutions in different countries been able to produce the same results? We see that the results are mixed. This is for numerous reasons.
In countries like Bangladesh, Grameen Bank and a few other MFIs have shown to have had a positive impact on the community. Studies have found household expenditures, savings and assets have increased while children’s school attendance rates have gone up. On the microenterprise, there has been increased productive activity, job creation, etc. A similar experience has been reported in Guatemala, South Africa, India and Bosnia. In fact, based on the Andhra experience, it was found that 18 months after the loans were disbursed, there was a high probability that the borrower would become an entrepreneur. Based on the good experience, MFIs started launching additional services to help borrowers increase productivity. Knowledge sharing sessions, training sessions, marketing services etc. were introduced.
However, this isn’t the case everywhere. Many countries haven’t had successful MFI operations. In northern Thailand, it was found that MFIs had no significant impact on the lives of the local community. For example, in Kenya, knowledge sharing sessions were organized by MFIs calling experts to educate farmers on exporting crops. A year after the farmers started reaping the benefits, they started defaulting. Mexico, Mongolia, Sri Lanka and certain parts of India have also shown mixed results.
There are numerous reasons why MFIs fail. The first is if the target beneficiary isn’t being engaged. Given the risk and cost constraints, the target population is ignored for another population. This population may not require the credit. Thus, while studying the impact, no significant changes in the conditions of the target population are found. Experience in Sri Lanka and Mexico has shown that these loans (even to mircoenterprises) acted as a stop gap arrangement to help bridge the fund flow mismatches. People who were unemployed or in between jobs took up loans and used the money to meet their consumption expenditure till they found another job. There was no intent to scale or expand their microenterprise. The businesses that were set up were also stop gap arrangements. The issue of borrowing for one purpose but using the funds for another has also been seen in many countries.
Due to the good experience during the initial phases of getting their money, MFIs stepped up lending activities. The increased the loans advanced to their target population. Since they are typically in certain regions, they focus on the local population. This ended up resulting in the local population being heavily indebted. There was excessive lending and borrowing finally making the loans unviable. These loans that were meant to save people from exploitative money lenders turned into MFIs taking that spot with larger principle amounts than interest rates. Thus, the economics of the business tends to get affected.
Interest rates play a very important role while determining outcomes and success. Increase in interest rates results in a decline in lending activities as the burden of the interest tends be too high. The increase in interest rates come from the need to make the venture sustainable. Increased pressure on commercial banks such as nationalized banks to carry out the government’s financial inclusion programs, the interest margin of MFIs tends to get squeezed. Since there is a trade-off between the amount to be paid on the source of funds and the amount they can charge to borrowers while also managing costs, MFIs sometimes have to resort to increasing rates.
The viability of the ventures is also an important aspect given the demands of the business. Grants and aids from donors and governments have played an important role in helping MFIs make it to another day.
Picture Credits : fortune.com