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India’s imploding microfinance industry update

The debate about microfinance in India is not really about whether or not it’s in crisis or at risk of imploding. It’s about why it’s in crisis and imploding.

Jonathan Lewis, a social investor and microfinancier, goes over the basics in the Huffington Post and can’t seem to make up his mind if India’s (or more precisely, the state of Andhra Pradesh’s) experience with microfinance is “Mendacious or Magnificent.” Lewis says the media:

“… are reporting on the impending implosion of microfinance in India, particularly in the state of Andhra Pradesh where subprime microlending has caused, or so it is alleged, a measure of microloan debt bondage, debt-induced suicides and rich profits for international investors, mostly Americans.”

Lewis criticizes this “hysteria,” says it is unsupported by the facts and makes the case for microfinance as still a viable means for fighting poverty.

David Roodman, a microfinance expert with the Center for Global Development, actually went to India to find out for himself, as he reports today in “When Indian Elephants Fight.”

Roodman’s previous posts on the Indian microfinance crisis had been, somewhat like Lewis and other advocates of microfinance, skeptical of some of the most egregious claims coming out of India — of loan-sharking abuses and the allegations of suicides among the indebted poor. Roodman, like many, had tended to assume that there was a bit of political opportunism and turf fighting going on.

It sounds like the visit to India changed his mind:

So let me be clear: In a week of talking to people in India about microfinance, I heard almost no one defend the behavior of the microfinance institutions (MFIs) in the villages and slums. Those actions appear indefensible.

Roodman certainly doesn’t let the government off the hook for its flawed response to the crisis. But he’s also pretty clearly concluded that the microfinance industry in India, or at least in the hotbed of Andhra Pradesh, has lost its mission focus on serving the poor.

While in AP, he talked to B. Rajsekhar, the CEO of the Society for the Elimination of Rural Poverty. It’s a public-private organization the World Bank had helped create that allows the poor to organize their own “self-help” groups for loans, credit and giving financial assistance in the community. Roodman quotes Rajsekhar saying there were plenty of self-help groups in AP but not in other parts of India:

If MFIs (microfinance institutions) were truly committed to bringing financial services to those who lack, why didn’t they go to states with fewer SHGs? Clearly, the MFIs are driven by greed. “Intent is not poverty alleviation. The intent is profit maximization on the MFI side.”

Roodman seems to have come away from his visit to India with the conclusion that the root of the crisis in Andhra Pradesh is not so much government malfeasance or simply a lack of adequate regulation (though both of those are legitimate concerns) as it is simple greed.

Nobody is saying, as Lewis seems to be worried about, that microfinance is not a good means for helping poor. It just needs more protection from this very human tendency.


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Tom Paulson

Tom Paulson is founder and lead journalist at Humanosphere. Prior to operating this online news site, he reported on science,  medicine, health policy, aid and development for the Seattle Post-Intelligencer. Contact him at tom[at] or follow him on Twitter @tompaulson.