Microcredit is currently in the news for all the wrong reasons (IIED)

Read at :

http://www.iied.org/sustainable-markets/blog/misleading-metrics-microcredit?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+duesouth+%28Due+South%3A+IIED+Blog%29

The misleading metrics of microcredit

by Adrian Fenton

Microcredit, often viewed as vital for low-income groups, is experiencing financial and social sustainability problems.  Is the preference for and dominance of financial metrics over social metrics eroding instead of underpinning the sustainability of the industry?

Microcredit – the distribution of small loans to low-income sections of society — is one of the more fashionable tools to appear on the international development scene in recent years.  It featured in the G8 summit, Toronto 2004; and 2005 was even the ‘Year of Microcredit’.

But microcredit is currently in the news for all the wrong reasons. Muhammad Yunus, Nobel Peace Prize winner and founder of Grameen Bank, is alleged to have made unauthorised transfers of donor funds.  In Andhra Pradesh, India, borrowers are refusing to repay their loans; others are reportedly committing suicide due to an inability to repay; while microfinance institutions (MFIs) are being accused of unethical practices.

Although existing blogs cover these and other controversies, this blog attempts to highlight how some performance metrics — used to measure the ‘health’ of the industry — achieve little in the way of transparency, concealing social and financial issues to the detriment of sustainable development and sustainable markets.  An example of this is the much publicised ‘repayment rate’ indicator — typically defined as repayments made against the amount owed.

Do high repayment rates equal successful markets?

Frequently one hears of microcredit repayment rates of 95 per cent, easily surpassing those found in traditional credit markets. Poverty reduction is often assumed to occur as a result of access to microcredit services, with clients using credit for microenterprises and making sufficient returns to pay loans back.  High repayment rates are taken to indicate reduced poverty, with these repayment rates being fundamental to the success of microfinance.  What’s more, since profit is generated by the MFI on the loan, this is presumed to indicate a financially if not socially sustainable market.

(continued)