Sunday, December 5, 2010

Micro Finance companies make a killing from the rural poor

MFIs: Profiteering from poverty

Excerpts exposed by Devinder Sharma's in his blog Ground Reality

"Dainik Jagran, the largest selling newspaper in India (it is in Hindi), has carried today (Nov 27, 2010) an interesting report that should serve as an eye-opener. It says that the Ministry of Finance had a couple of days back held a discussion on microcredit in which a document detailing the profits earned by the MFIs was placed before the members. The details are shocking, and show how the MFIs have been extracting their pound of flesh in the name of poverty eradication.

An analysis of 13 major non-banking MFIs shows that the profits these firms accumulated by charging exorbitant interest from the poor borrowers had swelled from Rs 677.3 crore in 2007-08 to Rs 3776.93 crore in 2009-10. In other words, their profits had multiplied by 5.5 times over a period of two years. Since the MFIs have failed to expand the borrower base, it is quite evident that the profit increase is based on the interest amount they have managed to garner.

So while the poor took the fatal route to escape the humiliation that comes with coercive recovery of outstanding loans, the MFIs have made it rich. Bandhan Microfinance has broken all records. Its profits swelled by 34 times in two years. Some of the other players -- SKS Microfinance, Ujjivan Microfinance, BSS Microfinance, Share Microfinance, Sampada Safurti, and Grameen Financial -- have also managed to collect huge profits. Further investigations are on.

MFIs Interest Profit (in crore rupees)
2007-08 2009-10

SKS Micro finance 170.1 958.92
Bandhan 6.56 222.11

BSS 7.03 155.38
Share Microfinance 113.08 475.27

Grameen FS 82.65 327.35

Samdana Safurti 127.45 724.09

Ujjivan 36.37 372.89

(Note: Rs 1 crore=Rs 10 million)

The above chart is self-explanatory. It tells us how lucrative is the microfinance business. If you are foreign educated, and have lost your job in the wake of US recession, it is time to head home and set up an MFI. You can make money from the laudable objective of helping the poor. Many of the stalwarts in the MFI business have done it like this.

And don't worry, you will have a huge support from an equally indifferent educated from the middle class who would call it a 'win-win' situation. Many iNGOs, who also thrive on lending for the poor, would back you up to the hilt. Mainline economists are always there to justify such financial crimes.

You make your profits by sucking the blood of the poor. The resulting social cost would be picked up by the poor.

A Norwegian film "Caught in the micro-debt" brings out the truth behind microfinance
All these months I have been telling you how microfinance kills the poor. But somehow I still find that many of the policy makers and planners are still sold to the flawed concept, and some genuinely believe that micro-credit actually helps the poorest of the poor. They (and this includes the Reserve Bank of India as well as the Finance Ministry) are reluctant to initiate any action that may pull down the shutter on something that I have always regarded as a crime.

What is however heartening to observe is that many concerned citizens across the globe have begun to see through the pernicious design, and have now started to question the very basis of the concept. An award-winning Danish documentary film maker, Tom Heinemann, has launched today his latest film "Caught in the micro-debt" (in Norwegian language). Premiered on the Norwegian State TV Channel NRK, the film is based on an investigation by Tom Heinemann who made 'several trips to Bangladesh, and talks with a number of international experts worldwide, shows that the Grameen Bank leads many poor women into a crippling debt spiral.'

You can watch the documentary at

The film also makes some serious allegations against Muhammad Yunus, founder of Grameen Bank, had transferred Tk 7 billion to Grameen Kalyan, which has nothing to do with micro-credit operations. More at:

According to a media statement: "The women pay about 30 per cent interest on loans, as they already have to start paying back after a week. The documentary tells the poor to harsh collection methods from Grameen Bank, which has received the entire 400 million in aid from Norway."

This film shatters the claims that were made by the microfinance institutes worldwide. I only wonder how could distinguished economists, academicians and policy makers eulogise the MFIs without first ascertaining the truth behind the flawed claims. Why didn't academicians at least warn the world? How could the World Bank/IMF and even the donors sink millions of dollars in such dirty enterprises? Why was the truth kept hidden?

Well, not only microfinance, the sordid truth behind the hyper claims being made by the biotechnology industry (and backed by the mainline scientists) has been kept under wraps by a corrupt regulatory regime. Pharmaceutical as well as the food processing industry have also managed to keep the stark truth remain hidden from public glare.There is something terribly going wrong with the people/institutions who are supposed to regulate the system to protect us.

The Norwegian Development Agency Norad, according to the press statement, had supported the Grameen Bank from 1986 to 1997 with a total of 400 million. Focal Point (the NRK programme that has brought this film) has gone through the entire archive of Norad, which has the Grameen Bank to make. Here it emerged that employees of NORAD in the early 1990's was concerned that the poor were trapped in a debt spiral.

In a memo from Norad 20 December 1993 states the following:

"In fact, according to a survey done by David Gibbons and Helen Todd of the 40 women with 10 years of membership (of Grameen Bank), had almost all borrowed privately to pay installments."

And in another note from Norad 1 June 1994 states the following:

"One of the matters which the report points out is that the credit concept as it has evolved, created fertile ground for a practice in which new loans can be used to repay current loans. This may help to explain the impressive repayment statistics as Grameen Bank operates. "

This only goes on to show that even as far as 1993-94 it was known that microfinance was not working. The film then goes on to quote a small borrower, Hazera: "I have had loans from Grameen Bank for 15 years, and I paid my installments on time. At one point I got problems with your refund. The staff of Grameen Bank came and called me names. They threatened me with selling panels from the house. If I did not pay, they would throw me on the street. They said many nasty things to me. I was scared and sold everything I owned and paid installment. The house will collapse. There are holes in the roof. I have no one in the world."

This is nothing but Goonda Raj.

Posted By Devinder Sharma to Ground Reality at 11/30/2010 09:04:00 PM

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