Microfinance has seen such an increased popularity in the last decade, which has led to more than 91 million customers, most of them women, with loans totaling more than $70 billion by the end of 2009. India and Bangladesh together account for half of all borrowers! However, the system is not as perfect as you may think. In fact, it may be quite the opposite. In India some lending firms are growing at 60 percent to 100 percent a year. Investors in India’s largest microcredit firm, SKS Microfinance, sold shares last year for as much as 95 times what they paid for them a few years earlier!

And quite frankly, politicians are a little jealous of the attention these lenders are getting, who are seen as profiteering at the expense of borrowers. According to the New York Times, the prime minister of Bangladesh, Sheik Hasina Wazed, who had once strongly supported these loans, recently turned her back on them. She said micro-lenders were “sucking blood from the poor in the name of poverty alleviation.” The no-pay movement, which was started in 2008 by Nicaraguan farmers after some borrowers could not pay their debts, is a serious threat to the existence of micro-lenders. This has now spread to other countries such as India and Bangladesh who are fed up with the micro-lenders. So what’s the issue? When the number of microfinance institutions grows too fast, and there is a lack of controls which causes over-indebtedness, it creates the inability for most borrowers to pay back these loans. 

Issues can come about when there are corrupt micro-lenders as well. In India, leaders in the southern state of Andhra Pradesh, have accused lenders of impoverishing borrowers. There are many stories in the local news in the state about women who had amassed huge debts, all because they were convinced to borrow more than they could afford to. Adding to the problems, many are using the money for health care or as a hedge against failed crops, rather than as start-up capital for businesses. India passed a tough new law in December to cap interest rates and regulate collections. In response banks have stopped sourcing micro-lenders, which has seriously crippled operations there.

So what can microcredit institutions due to reform and gain back the trust of the government and the people in these countries? Organizations that now offer only loans need to start microsavings accounts, which are said to ease poverty much better than loans. They need to limit overlending, and measure success by how many customers are breaking out of poverty.

There’s no doubt that these investments are key to growth rates for a country. If a country is ever to develop, it’s these small investments that could get them over the top. Another way to help out developing nations is to donate to charities that directly help the poor in these countries. We’ve already talked about Kiva, but I’m talking not-for-profits in general. Check out Charity Navigator for  ratings on every kind of charity you can think of!

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