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Show Me the Money

Microloans, micropayoffs? A student’s experience working in microfinance in India

By Meredith C. Baker

Microfinance has been a buzzword in the non-profit world for the past decade. Organizations like and BRAC have prided themselves on the success of the people they work with in developing countries. What happens however, when a for-profit bank enters into the world of micro-finance? Are micro-loans sustainable, and do they allow potential for growth in addition to an opportunity for people to escape poverty? During his time in Bangalore, India while working for Ujjivan, a microfinance institution, and its sister non-profit, Parinaam Foundation, Paolo Singer ’13 found that there are many confounding factors and room for improvement in the world of microfinance.

Indian microfinance organizations frequently uses poverty line statistics to shape their work, and poverty lines are an important political tool in India. The state uses them to decide who gets important benefits, and microfinance banks can use them to show whether they are serving the poor. These lines, calculated based on how much it costs to eat 2,100 calories per day, are inconsistent: The World Bank estimates 41.6 percent are poor, the Asia Development Bank, 65.3 percent, and the Indian government, 23.6 percent. The national household survey shows 62 percent of people in India receive less than 2,100 calories per day. The trend of manipulating poverty statistics is hurting the end social impact of government policies and microfinance. Singer says that Ujjivan—or any microfinance organization—needs to look at poverty from the perspective of the needs of its customers, not poverty lines. To underscore the danger of spinning these statistics, he unfortunately acknowledges that no major microfinance institution ventures into India’s slums, the exact places where credit for water filters, latrines, and vocational training would be most valuable.

Through extensive surveying in low-income areas of Bangalore, Singer found that family loans were primarily used for rent and education, and other immediate costs such as marriage and home repairs. He found that loan recipients prefer to pay loans back at steady intervals throughout the year, to the point where it becomes an important social activity. The added discipline to re-pay every month creates an incentive for customers to spend more money on up-front expenses. With no access to savings, customers use loan repayments as a safe investment for excess change every month. This phenomenon, which Singer notes as “backward savings,” results in easy credit being used by the poor as a replacement for a savings account.

“Microfinance companies need to begin to offer complete financial services, particularly savings,” Singer states. “If savings are not offered and encouraged, microfinance fails to empower adults to escape the cycle of poverty. It is the role of the government to ensure that microfinance organizations do not only offer credit to their clients—it currently doesn’t allow companies without banking licenses to offer savings."

In addition to offering financial services, microfinance will never empower individuals past the level of sustainability and promote entrepreneurship if the industry doesn’t start giving out at least slightly larger loans. Singer recounts the story of a laundry business owner taking out a small loan. Currently, she washes clothes by hand at a public washing location. She would like to invest in a washing machine to save time, hire employees, and expand her business, but she cannot get a guarantor to qualify. Toward the end of his stay in Bangalore, Singer gave a presentation describing field research and data analysis on the failure of microfinance to help customers increase their income and recommendations for better services. The CEO and founder of Ujjivan, Samit Ghosh, was in the room. After a prolonged pause, he replied: "Even my own customers tell me that microfinance doesn't help them out of poverty." With that, he walked out of the room, leaving the surprised managers shell-shocked. "He's never said it so bluntly before. You've now heard it from ‘The Man’ himself,” one said.

As the start of a solution, Singer recommends that microfinance companies find a way to give larger loans to fund promising businesses. They should also give targeted loans to the ultra-poor slum dwellers—that is, the bottom 50 percent of urban income earners in India. While even the poorest clients have repayment rates of 99 percent, incredible stigmatization exists for those living in slums. Managers in India view slum-dwellers as untrustworthy and below the “level” of loan officers.  Singer uses Grameen Bank in Bangladesh as a better model of successful micro-loans. “They've developed a formidable array of loans, savings, and social services for the ultra-poor, and they show that even the poorest will pay back their loans when they are empowered to invest in their futures,” Singer says.

While microfinance can be a great start to helping people mitigate some effects of poverty, Singer’s research in Bangalore shows that perhaps banks that give out loans need to start thinking beyond poverty line statistics to find more innovative ways to increase social impact and provide more holistic financial services. By committing to better targeted products and services that enable the poor to invest in themselves and their families, microfinance institutions can bring renewed vigor to their original missions to alleviate poverty. Indians—and the world—are still waiting.

Meredith C. Baker ’13, a Crimson Editorial writer, is a social studies concentrator in Eliot House. Her column appears biweekly.

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