ECONOMIC

JOURNALISM

EDITORIAL

PR
ESENTED BY:
UT
SAV GHULATI
 TY
DIV ‘B’
RO
LL NO 3081
WO
RD COUNT- 918
HAVE MFI’s LOST THEIR ETHICAL
VALUES?

Microfinance is the provision of lending services to poor families or

individuals, including self employed in poor states that lack access to

banking services so that they can start or expand their businesses in

order to earn their livelihood. It is the provision of financial services such

as loans, insurance and savings to people living in poverty. Microfinance

helps create a world in which the poor have a fair access to the economic

opportunities and helps them move beyond poverty. Going through the

article ‘ The Ugly Underbelly Of Microfinance’ in the ‘The Times of India’

dated October 18, 2010 , I came across an important fact that the Micro

Finance Institutions which started as non-profit organisations with the

main aim of poverty eradication are turning into for-profit institutions

which now have profits more than the banks they take loans from. Has the
aim of poverty eradication taken a backseat? Have the microfinance

institutions lost their ethical values?

The concept of Microfinance Institutions was given by Professor

Muhammad Yunus and put to practice through a small bank called the

Grameen bank. Muhammad Yunus received the Nobel peace prize in 2006

for his remarkable contribution in the area of microcredit.

All of us are aware of the level of poverty in India and the needs of the

poor people. Even though the poor are not living lavishly but they also

have some basic needs. In Stuart Rutherford’s recent book The Poor and

Their Money, he cites several types of needs of the poor such as shelter,

clothing, water, food, weddings, childbirth etc. How will it be possible to

finance for all this for the poor who cannot afford it. Here comes the

microcredit to the rescue. The MFI differ from the other banks in this

aspect i.e. the banks do not provide any financial service example loan to

those clients who have very low or no income but the Grameen banks and

MFI provide loans and other financial services to such clients at a very low

rate of interest so that they can afford it. But according to the sources,

today micro credit banks are not abiding by their basic rule of eradicating

poverty and instead are aiming at earning profits. Even though the banks

give out loans to the poor, they charge a 10% “flat” rate of interest 1
(Roli

Srivastava, Swati Bharadwaj-Chand & Partha Sinha, 20-10). Though the 10% rate

of interest sounds low but it is not, as it is charged on the principle

amount and not on the reducing balance which as a result makes the
client pay more. As a result, the borrower ends up paying much more than

he should be paying for the sum borrowed. The borrower ends up paying

an interest of over 20% rather than the 10% interest rate 1

this new tactic being used by the micro credit banks they are earning a

profit more than the SBI (state bank of India), who are one of their

lenders. This new tactic is not just taking away the ethic of these banks

but also resulting in suicides by the clients allegedly due to the strong arm

tactics used by the Micro Finance Institution’s agents to recover loans. On

interviewing Vikram Akula, founder of SKS microfinance, one of the

biggest MFIs in India, denies the possibility of its staff to use such strong

tactics to fool their clients and instead blames the new upcoming MFI

sensing the lucrative business. The blame game comes into the picture.

While the private MFIs blame the small entities for giving the sector a bad

name, the small entities believe it’s the big players of the sector which

give it a bad name. They believe that since big entities have bigger

targets to meet, it leads to all the problems as a result defaults in

repayments.

Nowadays many MFIs are turning into a profit earning institution. Basix

Microfinance was the first institution to adopt a ‘for profit’ model. Soon it

was followed by others turning into NBFCs and private MFIs and getting

listed on the stock exchange. There is no such problem in MFIs converting

into private or ‘for profit’ institutions. The problem arises when the

shareholders put pressure for higher returns. These high returns changed

the intentions of the micro financial institutions. Though not all the MFI are
corrupt and they have played a role in helping the rural areas but it’s now

a case of the rich banking on the poor. Ela Bhatt was quoted saying

“though MFIs were built on ethical values, somewhere it has got lost. This

is affecting the creditability of entire sector. When a woman works hard

and her repayment goes abroad, it is not good for the country and the

poor woman is the bigger loser”.

As they say there is no smoke without fire, even though the founder of

SKS micro finance won’t be agreeing with the divergence of the

theoretical and actual performance of the MFIs but it is analysed that the

MFIs are losing on their ethical values hence it is high time that these

micro financial players realize the change and work toward achieving the

actual goal of these institutions which would in return improve the

economic condition of the country.

REFERENCE

1. Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha, Initials. (2010,

October 18). The ugly underbelly of microfinance. Retrieved from

underbelly-of-Microfinance/articleshow/6766589.cms