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Microfinance under the microscope

How ‘collective help’ became ‘collective debt’ and the unintended consequences that followed

The Microfinance Industry (MFI) has changed dramatically since it was hailed by world leaders like Bill Clinton and Tony Blair as the way to eliminate poverty. It is now under political scrutiny in many developing countries and moves are being made to increase regulatory measures.

Dr Kamal Munir, Reader in Strategy & Policy at Cambridge Judge Business School, is surprised that the scrutiny of microfinance has not come sooner and feels the clock should be reset so that MFI returns to its original model.

Dr Munir has followed the MFI story closely as an advisor to various banks and financial institutions around the world including many where microcredit is a norm.

Originally it was about agenda empowerment, he says, helping the very poor and keeping interest rates low.

“Slowly the whole discourse changed. It was no longer about poverty alleviation but about financial inclusion or basically giving these financial products to the poorest of the poor which begins to look like the sub-prime mortgage crisis.”

Dr Munir is also concerned that the sector has played havoc with the ‘social capital’ of the poorer areas where people borrowed from each other.

“Even when the financial debt was paid off, the moral debt used to remain. This brought the community together and that built social capital.

“I feel it should return to the original model of microfinance which was not completely commercial. If you make it commercial then profits are being made from the poorest of the poor. Having the same model for that segment of a population or society, means moral questions have to be answered.”