MICROLENDING IS one of the most effective ways to help the world’s very poorest out of poverty. Tiny loans of $10 or $20 can help struggling families start small businesses that are the difference between chronic hunger and financial success. For a subsistence farmer in Kenya, or a bicycle taxi driver in India, microcredit institutions are often the only place to turn to for credit, banking services, and life insurance.
But, after years of explosive growth, the world’s microfinance sector is in trouble.
According to a recent report by the Microcredit Summit Campaign, the number of clients served by microfinance institutions has declined from 205 million to 195 million. That’s the first drop since the group started keeping track in 1998.
Most of the decline can be attributed to one place: Andhra Pradesh, India, where the rapid commercialization of microloans led to abusive practices. At first, most microloans came from nonprofits dedicated to helping the poor. But as the sector grew at a rate of 200 percent per year, other institutions got into the business. Some of them lent more than the clients could afford to repay and used harsh practices to collect. Negative press and a rash of debtor suicides spurred a government crackdown on the sector that severely restricted microlending.
A backlash against microfinance has cropped up in other parts of the world including Bolivia, where opportunistic politicians and disgruntled clients blockaded the offices of microfinance institutions, causing repayment rates to plunge.
These are cautionary tales about what can happen when institutions appear to be more interested in their own growth than the financial well-being of their clients. For-profit groups that charge high interest rates and pay high salaries to their own executives give microfinance a bad name. They are making money off the backs of the poor, not giving the poor a leg-up. The good guys in this industry should do their best to sound the alarm against such practices. Microcredit is a crucial tool against poverty, and its reputation must be preserved.