Micro finance and micro credit are among the major hopes for poverty alleviation. Professor Muhammad Yunus, jointly with Grameen Bank, received the Nobel Peace pPrize of 2006 for their work on this idea. The idea has been implemented in many countries around the world. In Can Microfinance work? Lesley Sherratt discusses the ethical, developmental, social facets of these institutions.
She is objective in the light of such prestigious optimism. She is trying to extract the real picture at ground level with list of concerns facing the individual borrowers associated with these institutions.
In the book Sherratt provides a detailed analysis of the phenomenon of Micro Finance Institutions. That it provided for a vehicle either to profitably or at no-profit margins lift significant volumes of humans above poverty index.
Sherelies on using empirical studies and about seventeen pages of bibliographic references and makes a strong case for tuning the micro-finance model. Furthermore she also suggests to reorient it into other regulated models. Examples of such models are subsidized savings vehicles, small- to medium sized enterprise(SME) funding, etc. With these improvements she hopes the microfinance institution will deliver on sustainable development goals.
The salient feature of micro-credit model is the trade-off between unit cost of a micro-loan and ability to lend and repayment to be done on a mutually sustainable basis between the lender and borrower. At the same time there is the emphasis from donors or financiers to reach the maximum count of borrowers.
The most appreciative part in this book is the pains taken by the authoress to define the terms in the ethical and social context. For example – Duty of care which is a moral or legal obligation to ensure the safety or well-being of others. In the specific real examples cited, duty of care is found lacking in the practices of the MFIs where the cons seem to outweigh the pros of managing the microcredit and its repayment.
Another common contract term in microcredit explained in detail – Group liability as one of the clauses causes group members to behave as unofficial loan offices on behalf of the creditor mfi. Hence they put coercion on individual borrower in the group who might be delayed or defaulting in the payments.
The theoretical ground for group liability is that loans without collateral and micro-finance borrower without long credit history make decisioning on loan advance difficult. Social and peer pressure comes into play with the advent of group liability with impact on day to day life of the borrower.
It is disheartening to read that coercive collection practices of MFI in one region hit by repayment crisis drove borrower to flight or even suicides. Probably this has happened due to joint liability, fines and other coercive loan recovery methods.
The book is broadly divided into four parts: 1) Empirics, 2) Microethics: the practices of microfinance, 3) Microethics: the industry of microfinance, and 4) Making microfinance more ethical.
In first section, Lesley draws on empirical studies and evidence to set a stage with background and economic models at work. Second and third parts investigate the ethical concerns in the dealings between the lender and borrower. Finally the last part summarizes first three and gives some recommendations to improve the ethical balance vis-a-vis the highlighted issues.
To conclude this review, layman reader through the financiers and leaders of the microfinance movement will find this book useful. There is some eye-opening statistics and conclusions brought out.
As the conscience keeper and an impartial analyst, Sherratt is doing a wonderful job of a deep dive into the ethical ills plaguing this important financial sector. Furthermore she is raising some heart-wrenching concerns and making counter-intuitive conclusions based on objective methods.
Sherratt makes some positive suggestions to improve the gaps and biases towards the end. These are to balance the economic, social,financial,ethical transactions between the microcredit lender and micro-credit borrower.