MFIs: confusion still reigns

The impact of the Andhra ordinance on MFIs must yield useful clues to design future regulatory policies.

Confusion continues to reign in the debate on microfinance that has unfolded following the promulgation of the Andhra ordinance, soon to be replaced by Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

A key confusion has been that microfinance is a major instrument of poverty alleviation. Going by the available scientific evidence and agreement among scholars, to-date, there exists no compelling study linking the expansion of microfinance to declining levels of poverty. Despite the images of groups of women starting small business projects to exit poverty, commonly promoted on the websites of microfinance institutions (MFIs), the use of microfinance for such projects has been surprisingly tiny. According to a recent survey conducted in Andhra Pradesh, households use less than 2.5% of all micro-loans to start new businesses. By comparison, many more loans go into buying stocks - as much as 10% when the source of the loan is an MFI.