globalEDGE Blog: gE Blog Series: Microfinance Part 5 - The Commercialization of Microfinance

gE Blog Series: Microfinance Part 5 - The Commercialization of Microfinance

The main idea behind microfinance is to provide small loans to the poor small entrepreneurs to help them rise out of poverty. Due to the nature of this finance sector and its origination in NGOs, funding for microfinance institutions comes mainly from subsidized funding.

In recent years, the sector has enjoyed success and has expanded too fast for direct subsidizing to be able to provide all funds. Therefore, microfinance institutions started looking into other sources for funding. Consequently, there has been a migration towards commercialization of microfinance. This trend was started by NGOs trying to attract international investors or by offering savings deposits to clients.

The commercialization of microfinance has become a very controversial topic. On one side, its supporters defend the trend by saying that it is beneficial to clients as it provides them with services such as savings accounts. Furthermore, the program has the opportunity to reach more people in a plethora of countries by expanding with the new funding.

On the other side, many feel that the commercialization of microcredit threatens the balance between business and economic development of poor nations. Furthermore, microfinancial organizations become more like commercial banks and start to seek profit which in turns leads to raised interest rates and puts more pressure on the clients. For example, when SKS Microfinance of India was commercialized, clients felt they were used for profits and that the new interest rates were unfair and therefore many defaulted on their loans.

Some solutions could be stronger government involvement. For example, governments in each country could set up stricter regulations to ensure that clients are treated fairly and that loan collection practices are not as aggressive as those of regular commercial banks. A cap on interest rates is a must as well.

What do you think? Is commercialization of microfinance a positive or negative turn for the sector?

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