by Brad Brown, Professor at the U.Va. McIntire School of Commerce and Olsson Center Senior Fellow
Microcredit and microfinance have captured the imagination of the world by providing what appears to be a successful model of economic development in which poor people lift themselves out of poverty by starting small businesses with the help of very small loans. The popular image of microcredit is that of poor villagers, mostly women, organized in five or six person support groups, borrowing small amounts of money to start “cottage” businesses to earn a little money to help their families.
However, as the microfinance industry has grown and spread around the world, almost all of the stereotypes about microfinance have been challenged. Allegations that microfinance institutions charge usurious interests rate and pressure the poor to take on excessive risk and debt have become well known. So many institutions claim to provide “microcredit” that the term has become meaningless except that loans are generally small and not regulated by any government.
We suggest a new future for microfinance institutions (MFIs). In order to better serve the needs of the poor, we propose government regulation, improved organizational governance and business models for MFIs. With a strict definition of “microfinance” true microfinance can be properly distinguished from other forms of financial activities. With adequate regulation and supervision, MFIs can take deposits from the poor thus providing a valuable service while obtaining money to lend. We propose that MFIs meet a strict definition and then be regulated and monitored to protect borrowers, which will also help to legitimize the microfinance industry.
The complete article, “Is It Time to Regulate Microfinance?” can be viewed online at Progress in Development Studies. My co-authors were Fahkruddin Ahmed and Susan Perry Williams.