The Myths Behind Microfinance

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Jude L. Fernando , 12.09.10, 04:45 AM EST

Debate over the value of microfinance in the developing world appears to be long overdue.

Recent revelations about the role of Nobel Prize winner Muhummad Yunus in the alleged misuse of $100 million by the Grameen Banks (and the cover-up of that misallocation) have begun to provoke overdue discussions on the value of microfinance in the developing world. Arguments against microfinance center around the claim that it is a development strategy increasingly forced on the poor, and that those who are claimed to benefit from it the most–poor women–are actually its chief victims. Critics have long sought a platform to reveal the weaknesses and explode the myths supporting microfinance.

The first myth is that microfinance requires no collateral. That is nonsense. Microfinance group leaders and NGO field officers take control of all the household assets of the borrower (land, home, jewelry, equipment, food reserves, animals, remittances, savings, furnishings, etc.), and force borrowers to convert those assets to cash if there is the slightest threat of default of any borrower within the group. Peer-group pressure is combined with the threat of being stripped of essential belongings, and becomes a powerful disciplinary. Borrowing households lose control over physical assets, the ability to determine its pattern of consumption, and use of labor, ceding them all to the community and the microfinance lending agency. Given a model like this, it is no surprise that those viewed as potential defaulters are harassed not only by the lenders, but by their peers, sometimes to the point of physical violence and suicide as has been the case in India.

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