Farewell to Microfinance ???

I found a very interesting article in Economic Times of 12th August with heading “Goodbye, Microfinance”. The article forecasts the end of microfinance. The beginning of the article “ Microfinance is slated to join the ranks of flint stones, the crossbow, gas lamps, the pigeon post, and floppy disk – all excellent in their own time but rendered obsolete by the march of technology” – appears very impressive journalistic piece. The author also tries to explain the reasons for that.

The article is both apt and timely when nation is discussing subjects like, inclusive finance, pro-poor banking, banking with and banking for bottom of pyramid. However, it does reflect how differently people read and understand microfinance.
The comparison of microfinance with crossbows and floppy disk is like comparing potato with humanity when you not only fail to understand commonality but you try to bring a concept parallel to the product of a concept.
There is a difference between microfinance and microfinance institutions. The concept or the practice of microfinance is as old as the development of economic practices in society, and today we are just trying to adopt it in present context. Even during the pre-colonial period microfinance was in practices when kings used to provide supports to their people, postpone, or waive off taxes when it was required.

It is true that in recent past microfinance, in its more formal and adapted form, has gained momentum. However, contrary to the point put by author that reasons (like, non availability of credit, very high rate of interest) which helped in microfinance are losing out. The opposite is true. Not more than 20% of poor who are below poverty line have any access to any formal credit system. And if consider the cases of poor states like, Orissa, Bihar, Jharkhand, Chhattisgarh, UP, etc. this number will further be lower. A simple addition of number of active bank accounts and number of customers different micro-finance institutions claim (in spite of fact that many of the borrowers are served by more than one MFIs in ‘good business’ areas) will give the number who are still in credit dark areas. To expect that government owned institutions will be able to lighten those dark areas even in coming ten years will be like expecting moon to come on the earth.
Although improvements in communication facilities, power situations, telecom and other infrastructures create a conducive conditions for overall development; however, to expect that it will have proportional impact on financial inclusion as well ,will not be correct. Our past experiences have proven that most of the benefits of such developments have been cornered by those who are rich and powerful and by those people are, of course, not the target for the microfinance.
Microfinance goes much beyond the micro-credit and it also includes micro-insurance, micro-enterprise development and strengthening. In one phrase...It is ‘financial capacity of building’ people, which is one of the pre-requisites of overall empowerment of the community. What to talk about rural areas, even in infrastructure rich urban areas our success rate is very low on all the above constituents of microfinance. We need microfinance in urban areas as much as in rural areas.
RBI initiative like, requesting banks to involve banking correspondents (BC) is basically meant to strengthen microfinance and not to replace it.
Frankly, microfinance has mainly to do with the amount, ticket size, number and volume of business, and infrastructure and technological innovations are only facilitative. Even if we have all the infrastructures and technology in place we will need microfinance. Yes, it is possible that its delivery system may get changed and streamlined. Microfinance remains the need of the time and it will continue to grow stronger and stronger.

Keep sharing...
Niraj

If you want to read full article of Economic Times follow the link: http://economictimes.indiatimes.com/opinion/columnists/t-k-arun/Goodbye-microfinance/articleshow/6296631.cms