Though microfinance is usually dismissed by critics as consumption smoothing finance or, at best, finance for the maintenance of existing businesses, the fact remains that the lower end of entrepreneurship is financed by families and friends, moneylenders and microfinance institutions, especially in developing countries. In the last three decades, microfinance has experienced tremendous growth in many countries across Asia, Africa and Latin America. But the growth trajectory has been accompanied by crisis in many countries at periodic intervals. Studies and reports reveal that client distress is the root cause of many of these crises. If microfinance institutions are the cause of client distress, questions arise as to whether microfinance has an embedded darker side. This paper examines whether microfinance in India has exhibited this dark side from time to time, what are the symptoms of “darkness”, how this phenomenon has affected clients, and what could be done to avoid this and ensure responsible lending.
This dark side is manifested through five facets.
Longer-term goals of MFIs include the quest to scale outreach and achieve profitability. Extending the depth and breadth of outreach is clearly central to microfinance’s mission of making an impact on poverty through financial inclusion. Sustainability is essential if MFIs are to attract lenders and investors in order to grow. But it is useful to remember that there are other client-centred consumer protection objectives such as transparency in dealing with borrowers and being careful not to saddle them with more debt than they can handle…