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Features of microfinance

features of microfinance

What is microfinance?


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  • It’s a sad world where a good thing gets hijacked by the greedy. Take socialism for example. actually don’t. We’re here to talk about development and third world poverty, which is serious stuff, so let’s not get sidetracked, and let’s start at the beginning.

    Microfinance initially emerged as an anti-poverty scheme which provides small loans to poor people who lack financial collateral, or simply the means, to take out a bank loan. The point is to fund a small business idea and would hypothetically look something like this: A family of fish-driers in Cambodia lack the means to buy fish or can’t afford the tools of their trade. They take out a micro-loan which they invest in fish and necessary tools to turn things around. Gradually they begin to make a profit, eventually pay back the microfinance lenders and become financially stable. Goodbye poverty. On paper it sounds great, so why is the microfinance industry in crisis and what’s with all the bad publicity lately?

    There may be many reasons for this. Firstly, the reputation of microfinance has, in recent years, been tarnished by the commercially minded who are focused more on maximizing profit than on poverty reduction. They’ve been loaning out larger sums than are necessary, accompanied by exorbitant interest rates. This has proved to be a debt trap for many poor people, resulting even in a microfinance suicide epidemic in India.

    The Nobel Peace Prize-winning economist and founder of Grameen Bank in Bangladesh, Muhammad Yunus, is considered by many to be the father of microfinance. He’s been quick to condemn the ‘commercial’ lenders and call them ‘loan sharks,’ but then some trouble came to bite him in the behind too. It involved allegations of corruption and was made worse when a controversy over microfinance lenders and politicians in India emerged after SKS Microfinance (a for-profit firm) made a public call for shareholders, offering potential giant profits. And finally of course there was the incident where Seattle-based microfinance firm Unitus (who had been an SKS stakeholder) suddenly closed down without explanation.

    All of this has rightfully raised suspicions. The ongoing dialogue among critics now is that micro-lending is hurting the poor more than it is helping them. So when you decide to give in good faith, how can you ensure that your money isn’t lining the pockets of those fat cats who are abusing the poor or driving an Indian seamstress to

    the brink of suicide? And are there organisations that administer interest free microfinance?

    The answer is ‘yes’. There are few NGOs that run interest free microfinance, where borrowers are charged absolutely nothing for taking out a loan or, in some cases, are charged a 0.something per cent service charge.

    A Pakistan-based organisation called Akhuwat has a story with a happy ending to tell regarding their interest free microfinance. Akhuwat’s model is based on an Islamic tradition called ‘Qarz-e-Hassn’, which entails helping the needy with an interest free loan as opposed to charity or doles. Back in the day when they were first starting up, their first loan of 10,000 Pakistani rupees (Dhs400) went to a widow who didn’t believe in charity, but wanted to buy a sewing machine. Now, the money had been donated to the foundation, so the widow was charged no interest and when she eventually paid it back (after she set up her home-based boutique and began making a profit) there was a pool of money that could be reused. It was loaned out again and again until the organisation earned credibility and started receiving more donations that could be used towards loans.

    Today, Akhuwat runs 28 branches in 16 cities. Its cumulative disbursement has exceeded 600 million Pakistani rupees (Dhs24 million) and its beneficiaries exceeded 50,000 in the past eight years, with a phenomenal recovery rate of 99.8 per cent. Akhuwat is just one example of a successful interest-free microfinance model. It is also proof that if donors became more savvy, and socially oriented organisations received enough support, the fat cats would have a harder time abusing the poor.

    Now let’s consider those popular online microfinance organisations (we won’t name names.) They’re registered non-profits that clearly state that every penny of your money goes directly towards funding loans, and furthermore that they don’t charge interest to their ‘field partners’ who administer the loans. The question is, who are the field partners and do they charge interest or take a cut for their services? The best way to be sure they don’t is to do your research. Call or email and ask them. Unfortunately we do live in a world where ugly things happen and we should take responsibility for what our money funds. Note also, while embarking on your research, that the key words here are ‘interest’ or ‘service charge.’

    For more info on Akhuwat visit alternatively check out the Islamic Microfinance Network for other charities that run a similar microfinance model .

    Time Out Abu Dhabi, 14 February 2012

    Category: Payday loans

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