Microfinance is a type of banking service offered to people who normally have no access to finance. People excluded from regular banking services are farmers, the poor, and often women. Microfinance has sometimes been called ‘financial inclusion’. However, this is a contentious term because there is still much debate about how accessible microfinance is for people.
Microfinance is mainly associated with micro lending. However, microfinance institutions (MFIs) also provide other services like financial and business education, and micro insurance.
WHAT IS COMMERCIALIZATION?
Traditional microfinance organisations, like BRAC, are charitable non-governmental development organisations (NGOs). These organisations do not make profits. Of course, they may sometimes receive more money than they spend, but instead of keeping this revenue for themselves they will spend it on their customers. In the case of microfinance, this means lowering interest rates or spending more money on financial and business education, for example. This allows MFIs to concentrate on their main goal, which is to deliver financial services to people who do not normally have access to them.
In recent years, however, commercial banks like Citi Group and Barclays have moved into microfinance. These banks are commercial because they make profits for their owners and shareholders.
Some critics are concerned that commercial banks providing microfinance will neglect the aim of providing services to traditionally excluded groups. Because they are motivated by profit, these banks may charge higher interest on loans. This may exclude poor people by making micro loans too expensive. Related to this, evidence shows that commercialisation of microfinance leads to fewer female customers. This is due to the fact women are often poorer than men and cannot afford higher interest.
Moreover, critics worry about commercial banks exploiting the poor by making profits off of them. Because the demand for higher profits may lead to higher interest rates, borrowers may struggle to repay their loans. They may end up acquiring more debt than they can handle. This could result in a debt trap whereby people continue returning to the micro lender for more money to pay off debt from a previous loan. Overall, it is feared that commercial banks getting involved in microfinance goes against the ethos of microfinance itself, which is one of financial inclusion and poverty alleviation.
WHAT DO THE COMMERCIAL BANKS SAY?
Commercial banks have responded to their critics. They say that they are able to reach more customers than traditional, charitable MFIs. This is because they are able to raise more money than regular MFIs. This money comes from private investors who give capital to MFIs in return for a slice of the pie. With the extra money raised, these banks could potentially offer cheaper services to customers. Commercial banks also claim that they are better at reaching more inaccessible applicants like farmers. Farmers are generally harder to reach because of limited infrastructure such as poor or non-existent roads.
The debate about commercialization is still ongoing. For now, charitable and commercial MFIs exist side-by-side.