Dr. Luke Juran is an expert on post-disaster recovery and recently graduated from the University of Iowa with a PhD in Geography. His interests are in post-disaster reconstruction, in particular, water and sanitation components of reconstruction and their role in both immediate short-term recovery and sustainable long-term development. His fieldwork was in South India.
In this short interview, he talks about microcredit, its evolution and impact in the developing world.
Q: How did you come to study microcredit/ microfinance?
Luke: University of Iowa runs winter courses, which are field courses in India involving environment and related areas. I signed up for one of these in my Master’s program (first year). I took a micro-credit course as I wanted to learn more about this field. This led me to discovering the field and its intricate connections to women’s empowerment, development and other issues.
When I signed up, anyone could do these courses and I knew I wanted to do development studies outside of the U.S and from that course onwards, I got involved, more deeply. Access to credit is a big problem in India (and other developing countries) and that is really the insight that the founders of microcredit had – to give small loans to those who desperately needed it, and also those who didn’t have access to a formal banking mechanism.
Q: What are the interest rates at Micro-finance institutions ( MFIs’). How do they compare with regular banks/ other outlets?
Luke: First off, people don’t realize that even many NGOs’ operate as banks. It doesn’t matter what they call the process. They borrow money and lend it out to individuals. There are operational costs that they have to cover, and also there could be losses in doing this. So, many NGOs’ charge high interest rates
MFIs’ are themselves borrowing money and charging interest to keep their operations going. One positive critique is that some of these NGOs’ act as a bridge to the formal banking market. When people take a loan and repay one or two loans, bringing them to a bank is easy. We vouch for them as a borrower, formal banks show more trust. This is turning into an industry in itself, and also has its criticisms now. The biggest positive outcome is that people who did not have access to credit earlier, now have it.
Q: So, is this a corporatization of the MFIs’?
Luke: In some ways yes, as it has become more profit oriented now. You have investors who are putting money, to make money. Folks who put money in IBM and other stocks, are investing in MFIs’. Consider mixmarket.org for instance. This sprung up as an alternative and some of the same people are investing in this sector, as it provides an alternative to investing in a regular industry.
I don’t think micro-credit is a panacea nor a malevolent capitalist tool either. You need more control, norms; and there are lots of positives that have come from it.
Q: So, do you think micro lending is a fad?
Luke: Microcredit is here to stay and it hit the water-mark when Mohammed Yunus won the Nobel Prize. Since the prize was given, the model has received a lot of attention. As much good has come from this, many people have unscrupulously exploited it as well, leading to suicides, family breakdown and other calamities. Microcredit is not going away, simply because poor people need access to credit. It fulfills a genuine need. Some MFIs’ charge a higher interest rate than banks, but less than the moneylenders; and on more fair terms. Also, a positive externality is that they offer other programs like healthcare, scholarships, nutrition classes for children of borrowers.
Q: So, what is the way forward?
Luke: While there are no easy answers, I think we must first move away from profit oriented ventures and actually look at why they were started in the first place. They are rated like banks, Standard and Poor’s and Moody’s. The MFIs’ are rated too, depending on the rate of return etc. What is happening is that the “micro-credit rating institutions” are rating the MFIs’. The largest one is called MCRIL, and its sole job is to rank them. These institutions were started for women’s rights and human rights. But ironically, they are not rating on social outcomes: enrolment rates, increase of education. Instead, the rating is done on return on investment, etc. Typically, an accountant comes in and looks at them like a financial bank and ranks them accordingly.
There’s no incentive to offer social programs in this model as the outcome being measured is very different from what it was intended to do. The rating institutions turn them into profit institutions. I believe that they shouldn’t be rated on how much money they make.
Q: Any concluding thoughts on this?
Luke: I am not sure that certain industries/ areas are ideally suited for microcredit. Agriculture is one of them. MFIs’ don’t suit them well because of weather variations. With the absence of crop insurance, what if a farmer loses his entire season of farming, due to bad Monsoons? Or if they don’t have access to pesticides. There are so many fluctuations of commodities as well as unpredictability of harvest season and then of course there are the middle-men to deal with too. If a farmer is unable to pay loans back, on a weekly basis, what does he do? Almost all the money is spent on buying seeds, tractor or other machinery. This is just one insight I am sharing with you. I believe that these things haven’t been thought through carefully.