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  • It’s the Politicians: Microfinance in India Continues to Take an Unfair Beating

    Microfinance institutions (MFIs) in India have been taking a serious beating recently. The threats and actions of politicians are so bad that they threaten the future of the industry in the country, and the primary reason is microfinance’s success.

    MFIs are working wonders to help people pull themselves out of poverty. Foreign aid has a bad track record over the past decades of being largely unsuccessful in alleviating poverty. MFIs have shown that there are alternatives to government-driven aid and that the private sector can—and under the right circumstances will—play a role in helping the poor.

    The key is that MFIs provide a tool, not a handout. And the tools come not just in the form of loans, as is the common association. MFIs also often provide savings accounts and insurance. The poor often live in rural areas with little access to traditional banks and therefore normally have no reliable place to store money. When their only income comes from a harvest, which happens once or twice a year, they are forced to store their harvest income unprotected “under a mattress” and have the self-control not to spend it too quickly. Or, alternatively, they actually pay someone to hold their money for them.

    Think of how backwards that is: In the West, we receive interest on our savings accounts. The poor have so few options that they pay someone else to hold their money for them, as it at least won’t be stolen from their house or washed away in a flood or other natural disaster. Having access to a savings account is a substantial step toward having a steady income throughout the year. Some MFIs even require people to put aside a small amount of their income each month toward savings to teach them financial basics.

    Some MFIs also offer insurance. Rural farmers are vulnerable to debilitating weather fluctuations; MFIs can allow farmers to insure themselves against crop loss. Insurance can also help in a disaster, such as a fire.

    And of course, MFIs provide loans to poor people who otherwise have no access to capital, allowing them to start small businesses or invest in a current business. In addition to businesses, MFIs are also a credit source in emergencies. Before MFIs, if a family member fell ill and required treatment, a poor family would have to borrow money from a local money lender, who may charge as much as 300 percent annual interest on the loan. MFIs empower people to not be beholden to such lenders.

    So why all the problems in India right now? MFIs are taking power away from politicians, and the politicians don’t like it. MFIs empower people to take care of themselves, become more economically free, and rely less on politicians and government officials who demand bribes for services. Microfinance also improves education, as more parents can afford to send their kids to good schools. And a more educated population holds a government more accountable.

    It also seems that the politicians have found an easy way to score political points and votes. By painting the MFIs as the “bad guys,” the politicians become the good guys. The politicians tell borrowers not to repay their loans, relieving borrowers of debt in the short run, which in turn earns the politician a vote in the next election. In the long run, however, unpaid loans will put MFIs out of business. Additionally, the politicians are working to cap interest rates, require specific repayment methods, and more. While this may sound good in theory, in reality capping interest rates would limit the population that MFIs can serve, as they would no longer be able to reach the poorest of the poor.

    The politicians are even harming the achievement of India’s own primary economic goal of “inclusive growth.” By cutting the poor off from access to finance, they are ensuring that the poor—especially the rural poor, who make up close to 60 percent of India’s population—are unable even to try and keep up as other sectors of the economy take off.

    If the officials are allowed to follow through, poor families will once again be left only with seedy money lenders for finance and one fewer tool for pulling themselves out of poverty.

    Posted in International [slideshow_deploy]

    8 Responses to It’s the Politicians: Microfinance in India Continues to Take an Unfair Beating

    1. Gregg Weber, Seattle says:

      If this is true then the bankers and politicians are strong candidates for some Scrooge Award.

      Capitalism needs morals else it would be just another form of control over the people to benefit those with power.

      If so, a pox …

    2. Pingback: » Financial News Update – 12/27/10 NoisyRoom.net: The Progressive Hunter

    3. Pingback: Tweets that mention It’s the Politicians: Microfinance in India Continues to... #American_Leadership #India #microfinance #heritage #tcot -- Topsy.com

    4. HawkWatcher, Mi. says:

      We seem to be fighting these would-be enslavers, these "politicians", everywhere we look. Power-hungry Statists from all corners of the world are using the same tactics that Obama, Pelosi, Reid, and the Democrat Congress have used: growing social dependency through largesse and redistribution, while crushing free markets and individual liberty through regulation and a penalty-reward tax system.

      Statism is a fail, it has always been, and will always be a fail. Most Americans know this, hence the "shellacking" of the Democrats, per Obama.

      Like America, Indian voters would do well to elect lots of regular, tea-party type people who will truly advance their national interests. Like America, an out-of-control government in India will run the country into the ground unless stopped dead.

    5. Don Harper, Lubbock, says:

      It is instructive to compare India and Hong Kong. Both were British colonies until achieving independence. Hong Kong chose capitalism and is one of the most prosperous entities in the world. India followed the path of socialism, and most of its population is mired in poverty. Socialists, while claiming to want to help the poor, actually crerate more poverty thru their unworkable policies that fail to take into account human nature. Or perhaps they do take into account the worst aspects of human nature.

    6. Matt, CO says:

      Greed is greed, no matter what the culture or language barrier. Disgusting, absolutely disgusting.

      Another 'fine' example of "career" politicians looking out for themselves.

    7. Spiritof76, NH says:

      Political power requires dependency of masses. Capitalism liberates people from dependency. That is why all the big government politicians, whether they are in India or the US are all socialists of one degree or another. That is why the American founding principles created the bottom up and extremely small cebtral government. No matter how many times the socialistic policies have failed, they keep coming back. We must destroy that notion for ever if human beings want to be free, prosperous and at peace.

    8. Subhodeep Mukhopadhy says:

      An excellent post (and one of the very few posts) that explores and analyzes the events in the state of Andhra Pradesh (AP) in India in an unbiased and scientific way !

      Media houses, both in India as well as in other parts of the world, have painted MFI's as the villains by resorting to rhetoric and by printing unverified and baseless 'sensational' 'human-interest' stories linking suicides in AP to MFI recovery practices – but the saddest part is not a single agency (including the government), has undertaken any effort to conduct a thorough methodical research into the suicides and establish any causality with MFI recovery practices.

      In fact, in addition to the points you have mentioned in the post, you may also be interested to know that the draconian MFI ordinance (now a State Bill) issued by the State Government to clamp down and kill the MFI industry are targeted only (I repeat, only) at the MFIs and not at the Government sponsored microfinance scheme thru SHG (Self-Help Groups) or at the private money-lenders. This assumes a very high significance when seen in the context of the following statistic (from IFMR, India) about poor households in AP:

      10% have MFI loans

      40% have Bank loans (4 times MFI)

      50% have Government SHG Loans (5 times MFI)

      80% have informal loans (private money-lenders) (8 times MFI)

      And, private money-lending in AP is primarily controlled by politicians. The politicians are trying to create a playing field in the microfinance space with only one player – the politicians (thru SHG's and private money-lending). And more importantly, if we go by the politicians' and medias' analysis that MFI' recovery practices caused suicides, then the government and the politicians should be held 5 to 8 times more responsible for the suicides of these poor people (using the above statistic). However, I will not make any such statement – that which is not backed by sufficient data as yet.

      These politicians in AP have made a mockery out of democracy and free market, which is rather unfortunate.

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