Is " For-profit Microfinance Institution" ethical? A completely new perspective on "What is the morally (read ethically) correct interest rate to be charged" has emerged ever since an increasing number of researchers have started looking at this aspect of Microfinance. However, as a friend recently commented – there are far more people out there looking to make a buck than in trying to make a difference. And more importantly, it seems quite fashionable to be involved in microfinance, in one way or the other. The moot question really is "Are we making a difference to the lives of the poor?" Is that one of the objectives, in the first place!
I just happened upon a document on the CGAP.org website which listed about eleven key principles of microfinance (http://www.cgap.org/gm/document-1.9.2746/donorguidelines.pdf) endorsed by the G8 countries. Key among the principles is one that reads:
Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from donors and governments.
So, this is clearly a very overt statement that it is ethical and in fact very necessary to charge interest rates that will allow MFIs to cover their costs.
However, I think the more fundamental question is "Irrespective of the model, are we in any way alleviating poverty…or at least making progress in that direction". I think there are enough stories to provide evidence that microfinance has made a difference in the lives of many people. I think it is reasonable that given access to financial services (primarily credit), an industrious person will have the means to haul himself out of poverty…and on the road to progress. I don't have the data to suggest that a majority of the people do so. In fact, I think there has been so much emphasis on making this a commercially viable proposition, that there is more data collected on the number of outstanding loans, repayment rates, and amount of loan disbursed and other financial metrics that lends credence to the growth and profitability of microfinance institutions. There is far less data is available on current poverty levels, the extent of poverty alleviation that has actually happened or the number of people for whom this has become a means of sustainable livelihood. We do have recent surveys on Progress-out-of-Poverty Index (PPI), CERISE, and USAID coming up with social performance audits and means for tracking social performance. Nevertheless, I think that funding available to carry out such surveys in a more rigorous manner, as well as the initiative by MFIs to monitor progress of their social missions have been found wanting.
So, is there a role for Donor organizations in the face of increasing commercialization of Microfinance? Or should Microfinance be predominantly a donor-led activity to ensure that we do not drift away from our social missions? I would like to imagine that both can and should co-exist. In fact, the Key Principles of Microfinance lays out the roles very nicely:
Donor funds should complement private capital, not compete with it. Donors should use appropriate grant, loan, and equity instruments on a temporary basis to build the institutional capacity of financial providers, develop support infrastructure, and support experimental services and products.
When this is combined by strong government policy, which brings microfinance into the mainstream of financial policy, then we are likely to see overall development and growth. Donor funds will then be able to find its way into development and infrastructure-related projects – those that are in alignment with the Millennium Development Goals – especially in the area of health, education, low-cost housing and sanitation. When the basic infrastructure is in place, I think we will begin to see quantum leaps in social performance and poverty alleviation. In such a scenario we will see a clear distinction of use of funds based on the source of capital, and a harmonious coexistence of both forms of microfinance.
