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Pitfalls of Microfinance: A Silver Bullet?

Authors: Ariel Chng, Jan Jakob-Kruger, Gopal Modi & Andrea D’Souza


Introduction


In recent decades, the wave of microfinance has rolled across the world, making itself an inherent cornerstone of enabling certain underprivileged groups in societies access to financial resources, services and knowledge. While the miracles of microfinance has been touted in case examples such as that of Bangladesh’s extreme poverty rate being reduced by nearly 8% in 2016 since its inception in the nation in the 1970s, or of Musoni Systems in Kenya, a cloud-based banking system that has allowed thousands of clients to connect with over a hundred microfinance providers. In the United Kingdom, the government has also extended its support to microfinance institutions (“MFIs”) through the government-owned British Business Bank which funds loans to micro-entrepreneurs through its partner-company the Start Up Loan company.


A sound evaluation of any financial inclusion tool should also assess its shortfalls, which this article here serves to do. Ghastly stories of how microfinance has done the very reverse of what its pioneer Muhammad Yusuf had set out to do have consistently plagued media attention, painting the narrative that it has become yet another entrapment of impoverishment. Kanakam Ramesh, a 27-year-old father of two, was one of many victims of microfinance. He committed suicide in 2010 upon being embroiled in a dispute over his wife’s inability to repay Rs36,000 (US$750) borrowed from an MFI devoted to empowering rural women.


Our article aims to evaluate some key contentions against microfinance: (i) the growth of informal sectors leading to anti-poverty alleviation; (ii) governments substitute policy-making and institutions with MFIs; (iii) MFIs’ forgoing of social missions in pursuit of profits; (iv) abuse of microfinance’s reputation for being a saviour against poverty to promote private agendas that go against the greater good for society; (v) asymmetric information in microfinance transactions; (vi) lack of sensitivity towards cultural factors when setting up MFIs; and (vii) lack of sustainability of MFIs.


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