Today I listened to this Global Prosperity Wonkcast with David Roodman:

A crisis is unfolding in India’s microcredit sector that– beyond its immediate effects on borrowers and lenders– will greatly affect the future of financial services for the poor. I’m joined by David Roodman, senior fellow here at the Center for Global Development and author of the forthcoming book Due Diligence: A Guide to Microfinance (which he has shared step by step on his Open Book Blog). David recently traveled to Andhra Pradesh, the epicenter of the crisis. On the Wonkcast, he leads me through the story of the explosive growth of Indian microcredit– and its sudden fall from grace. [more]

The microfinance crisis in Andhra Pradesh has been compared to the situation in Nicaragua, which I wrote about for MyKRO last year. I haven’t been following the news all that closely, and the podcast gives a fascinating overview. I found the following points particularly thought-provoking:

• Entrepreneurial journalists found out that as many as 30 microfinance borrowers had committed suicide in the state of Andhra Pradesh. This put the dark side of microfinance into the spotlight, and made it a political issue.
• When compared with other personal finance options in India, microfinance is a mass production with low-quality service. Microfinance Institutions (MFIs) are more aggressive about repayment, unlike moneylenders (who charge higher interest rates but are like “parasitic organisms… who don’t want to kill the host.”)
• Investors might be part of the problem, and not just part of the solution. The “bottom of the pyramid” gospel says that microfinance should commercialize, so it can scale and provide more opportunities to more people. The “social investors” promoting this gospel have good intentions, but their drive for scale might have lowered the service standards for these organizations.

That’s a photo of microfinance borrowers in Andhra Pradesh, from this Indian news website.

Andhra Pradesh : Micro Finance becomes ‘Macro Curse’ for people The past few years have seen the entire microfinance sector grow exponentially. As with any other boom, suspicion always exists on whether a bust is just around the corner. This is especially true in the current international setting; with a major financial bust that humbled Alan Greenspan to admit he was “in a state of shocked disbelief”.

In hindsight, it might seem obvious that the years of heady growth directly resulted in the sub-prime crisis and credit crunch. This heightens the sense of unease over the rapid growth of the microfinance industry and one is often seized of whether we are sitting on a bubble waiting to burst.In the case of microfinance, a bubble will be created if a significant number of members are funded beyond their repayment capability.

The atrocities of the Micro finance men on the consumers is increasing day by day. Already two people have committed suicides in the Srikakulam and Warangal districts and some suicide attempts.Since past two days the people have attacked the offices of microfinance and destroyed the infrastructure.

Read the rest here.

Overall, I think that the situation in Andhra Pradesh is devastating and tragic, but should not be interpreted as a blanket statement that microfinance is harmful.

I think that the key issues in microfinance are education and customer service. It is absolutely crucial that borrowers know how to use their loans, and that the MFIs provide real service. I think education and customer service should take precedent over commercial scale.

What do you think?

Casey Wilson recently had a great email that she sent out about the recent articles about Kiva in the NY times that I thought was worth posting:

You might have read Stephanie Strom’s article “Confusion Where Money Lent via Kiva Goes” in the New York Times a few days ago.  This issue has been making the rounds since David Roodman’s post a month ago.  As a fellow “peer-to-peer” microfinance organization, we thought it was important for us to follow up with our own supporters on this issue.

To be clear, contributions on Wokai go to microfinance institutions (our “Field Partners”) in rural China, who are in charge of distributing the loans to the borrowers and collecting repayment.  A borrower can in fact receive a loan from a Field Partner prior the time the loan is “100% funded” on the Wokai website.  Below are two excerpts from Wokai’s FAQ that might shed more light on the issue.

Can a recipient’s loan start before it is 100% funded?

Yes. Once a Field Partner has posted a recipient’s profile online, Wokai Field Partners can use their own capital to issue that recipient’s loan. Wokai then reimburses this capital to the Field Partner once the recipient’s loan has been 100% funded. If the recipient’s loan is canceled for any reason, the recipient will no longer be designated as a “Wokai recipient” and that Field Partner will permanently fund the loan with its own capital reserves.

What happens if a recipient’s loan does not get 100% funded by the final fundraising day?

If a recipient’s loan is not 100% funded by the time it reaches zero “Days Left”, then Wokai will either extend the recipient’s fundraising period by one month or, if there is any specific reason why contributors are choosing not to fund the recipient, Wokai will cancel the recipient and allow contributors to select a new recipient to support.

Wokai is committed to being transparent in its processes.  To that end, we discuss our field partner relationships right on our “About” pages.  We even received credit from David Roodman in his original post for being very open about our relationships with field partners.

To read more about what Wokai does, visit their site at Wokai.org

With the current global economic crisis going on, people are asking many questions about how microfinance will handle the situation, and to what degree MFIs will be affected. As I was thinking about this, I asked myself “am I making the right decisions when I lend?”  I am always interested in learning about new lending platforms and usually just give each one of them a fair trial and then determine which ones I like based on user experience.  I realized that most of my decisions on who to lend to are based on how easy it is to lend and how intrigued I am by the entrepreneurs story.  However, although this makes things fun for me, it is not always the most effective solution.  To piggyback on Drew’s post discussing interest rates,  I have found some interesting posts that lenders can consider when making decisions:

-Ryan Calkins, over at SeaMo, recently made a post entitled “Nine Questions to Ask Every Microfinance Institution” which discusses some questions that the Grameen Bank has come up with to determine which MFIs are good investments.

-David Roodman discusses interests rates and lending in his blog post “When is lending just?”