In the industrial economy of the 80s, microfinance emerged as an option to eradicate poverty. But due to high volumes and profitability, it has become heavily commercialised. The higher interest rates and over-indebtedness have led to a high suicide rate among borrowers. Which raises the question, “is it fair to maximize profits from the poor”. In this article, we examine the need to be ethical while addressing the problems of microfinance.
Microfinance (MF) has come a long way since its inception in the 1980s as a social instrument to help the poor. It is now a fledgling market with more players like NBFCs, small business banks, and self-help groups. Currently, the global microfinance market is over $178.84 billion and is expected to grow by 10.8% to $496.90 billion by 2030. (Microfinance Market Size, Share and Industry Forecast – 2030 (alliedmarketresearch.com)
Only 6% of the poor have access to formal credit, the high volumes have attracted more players. That’s why in 2021 the Reserve Bank of India (RBI) saw 94 registered Microfinance Institutions (MFI) in India.
Problems of ethics in MF:
MF intends to provide capital to the poor and uplift society. But due to heavy commercialisation, it has been misused in the past three decades. To chase profitability, the MFIs charge interest rates as high as 30% to 100%. Moreover, studies suggest that in their bid to lure investors, MFIs chase high net-worth individuals and neglect the poor. Thus, the funds are made available to the rich at cheaper rates.(Ethics in Microfinance | OpenMind (bbvaopenmind.com)
Why is it important to be ethical to solve problems of Microfinance
MF has a noble aim to serve the unserved sections of society and alleviate poverty. It is due to their efforts that over 4.5 million people were brought under the threshold of Rs 100/day globally between 1990-2010. (An analysis of the current state of ethics in microfinance. sevenpillarsinstitute.org). However, it has become a profitable business for many institutions. Here are four reasons to be ethical to solve problems of microfinance.
1) Reduces poverty –
While our constitution promises equal opportunities for everyone, the reality is different. Equality in financial services does not exist for the poor who are at the mercy of loan sharks. MF makes funds available to the lower strata of society to lead a life of dignity. As per statistics, 90% of MF business loans are used for non-business purposes. People buy objects and services with this money which better their lives.
2) Leads to women empowerment –
Microfinance is particularly targeted at women as they are better at repaying loans than men. As per studies, 4 out of 5 MF clients are women. In India, women get micro-credit through self-help groups (SHGs) which they use to have sustainable livelihood. Their financial contribution to the family raises their self-esteem, earns them respect, and gives them decision-making power. They get a say in their children’s education, family health, investments, etc. (Role-of-Microfinance-in-Empowering-Women.pdf (ijemr.in). And thus, leads to women’s empowerment.
3) Helps in business growth –
MF is said to be based on a simple hypothesis that every person has an entrepreneurial spirit in them. By providing them a collateral-free loan, an MF helps a micro-enterprise expand itself to become a small business. According to a study by Crepon et al, in rural Morocco, easy loans by MFs has led to the expansion of existing businesses in the agricultural sector.
4) It’s possible to be ethical & profitable –
This is amply demonstrated by Pro-Credit Holding -AG (PCH) of Germany. It follows a commercial approach and is profitable without biting into the flesh of borrowers. The group has 22 small business banks in 22 countries and was about to bring out an IPO. But it had to step back due to the 2007 global financial crisis. Even then it has been able to maintain steady growth in consumer loans of over 7%. And in 2021 registered 68% in profit after tax.
With technology, MFIs can be ethical
MFIs argue that they charge higher interest rates to cover their operational costs. But with increased digital penetration and technology, it is now possible for them to tide over this issue. Today many banks, NBFCs, and Fintechs operate online without investing in costly operations. MFIs can adopt this model and serve society without burning a hole in their pockets.
Finezza’s lending management software is a preferred choice of many MFIs and NBFCs (non-banking financial institutions). If you are an MFI or NBFC in need to integrate your software to offer world-class banking services to your clients, then do get in touch with Finezza. Contact us today to integrate your services with Finezza.