CGD Policy Blogs
The passage of time, the approach of the end of the year, and the ongoing review of microfinance regulation by the Reserve Bank of India--appointed Malegam committee seem to have prompted people to sum up what happened in Andhra Pradesh and extract lessons. E.g.:
This is a guest post from Elisabeth Rhyne, managing director of the Center for Financial Inclusion at Accion International, based on her presentation at this month's public discussion of the global implications of the microcredit crisis in India.
In a private email a couple of weeks ago, David Roodman challenged a few of his contacts in the microfinance sector. He wrote, “Commercial microfinance is under attack in way that it has not been for a long time. Milford Bateman has published his book arguing that it is doomed by its very nature. Yunus is publicly chastising investor-owned MFIs and pinning blame for the ‘wrong turn’ toward investor-owned MFIs on the ‘World Bank.’ And there is the debacle in India.”
As usual, David is right. The current crisis in microfinance in Andhra Pradesh is the most serious challenge to the microfinance sector in its brief history. In the wake of the crisis, calls are arising to “recalibrate” microfinance, or, as Vijay Mahajan put it, to “get the house in order.” While the origins of the crisis are complex, and many of them are India- and AP-specific, the crisis reveals shortcomings in microfinance that urgently need to be addressed.
This recalibration needs to be as vigorous as we can possibly make it. As I think about past crises---in Bolivia, Nicaragua, and in AP in 2006, I am struck by the sluggishness of the response by the industry. Those in the thick of the crisis learned some lessons---the hard way---but the rest of the industry has tended to shrug it off as someone else’s problem. Complacency rules, as it does in most things where human beings are involved. Compare this to the world response to climate change---some responses, but nothing like what is needed. Al Gore’s charge has been: WAKE UP! And that is my call to microfinance. Because microfinance is a much smaller arena than global climate change, we have a more manageable set of tasks.
Herewith, a Six-Point Action Agenda.
Get serious about Client Protection. We started working on what is now the Smart Campaign two years ago. When I look back, I see that we have made enormous progress. The microfinance community has come together around a set of six Client Protection Principles. These principles are widely known and accepted. At first, we often heard MFI leaders say “We don’t need to work on client protection because we’re already doing a good job” or “We aren’t convinced of the business case for client protection.” No one says that today. But there is still a long way to go before client protection practices are robust enough to prevent future problems in avoiding over-indebtedness (Principle 1) or increasing pricing transparency (Principle 2).
This summer I took a break from microcredit to return to my first love as an analyst in economic development, the Jubilee 2000 movement, which fought successfully for cancellation of the sovereign debts of the poorest nations.
On Monday the Financial Times opinion page carried a defense of India's microcredit industry by nine esteemed academics, including four native to India and one to Pakistan. If you have trouble getting through FT's gate, read this earlier version for the Indian Express.
An excerpt from the FT version: