A recent article from LiveMint.com reported that MFIs are now reaching beyond their traditional role of supplying enterprise loans and have begun consumer-lending initiatives. [1] These new schemes involve offering consumer credits by allowing the poor to buy products such as mobile phones and pay in installments. Since consumer lending does not directly serve to finance the poor’s income-generating endeavors [5], many have raised skepticism as to whether these strategies fall within scope of MFIs’ roles.
Though SKS and other MFIs have begun such expansion into consumer interests, microfinance experts still heavily debate the legitimacy of their roles in consumer credit provision.
According to a discussion paper published by responsAbility, a worldwide provider of social investments, pragmatists in the field of microfinance believe that there are benefits that come with consumer credit, in addition to increasing MFIs’ bottom lines. They believe that consumer credit can allow the poor to purchase products that they may not previously have had access to. In addition, the process of approving a consumer loan is far less complex than for microfinance, which means that MFIs would be able to extend their services to a greater number of clients. Diversifying the range of products provided may also benefit MFIs looking to increase distribution channels and funding from venture capitalists and private equity investors. [1] Though some criticize that consumer lending merely increases the short term burden of debt for the poor, experts such as Robin Roy, associate director at the audit firm PricewaterhouseCoopers, said that the long-run benefits of offering consumer credit could be essential for the poor to “move up the value chain.” [1]
However, those that oppose MFIs involvement in consumer lending tend to be microfinance traditionalists, who believe that consumer lending violates the main mission of microfinance, which is to provide personalized and flexible loans for income-generating and productive purposes to the poor, who are self-employed and unable to put up traditional collateral to standard banks. [5] In contrast, consumer credit tends to be provided in the form of standardized loans that are more salary-based. Thus, many argue that consumer credit is granted based on the client’s financial capacity to pay back the loans, without providing any direct support to helping the clients secure income-generating activities. [5] They view this diversification of services as risky and exploitive. While it may increase business for MFIs, it also may lead to the further entrench the poor in debt and a possible increase in defaults. [1]
Though the discussion over consumer lending is ongoing, according to the paper by responsAbility, it is essential for MFIs to be aware of each type of credit that they are loaning to clients. The organization recommends that if MFIs plan to expand into consumer lending, they ought to increase transparency and risk management capabilities in order to ensure that clients’ financial security, and the main socioeconomic goals of microfinance are not compromised. [5]
By Radhika Chandrasekhar, Research Assistant
Bibliography
[1] Livemint.com. “MFI’s take to consumer lending, but repayment concerns remain.” http://www.livemint.com/2009/09/07230201/MFIs-take-to-consumer-lending.html
[2] Mix Market – SKS. http://www.mixmarket.org/mfi/sks/data.
[3]Nokia Corp. http://conversations.nokia.com/2009/01/02/best-of-2008-in-services-nokia-life-tools/
[4] MicroCapital.org. “MICROCAPITAL.ORG STORY: Nokia and SKS Microfinance to Introduce New Mobile Phone
Features for Rural Poor.” https://www.microcapital.org/microcapital-story-nokia-and-sks-microfinance-to-introduce-new-mobile-phone-features-for-rural-poor/
[5] responsAbility. “Consumer Credits for the Poor – Risk or Opportunity?” http://www.responsability.com/domains/responsability_ch/data/free_docs/rADiscussionPaper5-ConsumercreditsforthepoorriskoropportunityEN.pdf
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