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David Roodman's Microfinance Open Book Blog

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But does microfinance, in fact, help the poor?

To help answer this question, I visited Hyderabad, India, in June. The Poverty Action Lab at the Massachusetts Institute of Technology, run by Abhijit Banerjee and Esther Duflo, economics professors at M.I.T., and Sendhil Mullainathan, an economics professor at Harvard, has begun a study of microfinance in Hyderabad. The lab is monitoring thousands of borrowers from Spandana, one of the largest microlenders in India. At the end of a two-year trial period, the study will compare microfinance recipients to peers without comparable opportunities.

Near Hyderabad, in the state of Andhra Pradesh, political opposition to microfinance has begun. State officials have fed negative stories to the media. They charge that microfinance debts have driven some people to ruin or perhaps suicide. They call Spandana’s programs “coercive” and “barbaric.” They question whether the “community pressure” behind repayment is sometimes too severe.

The motives behind this campaign are twofold. The state is not a neutral umpire but rather has its own “self-help group” banking model, which lends at the micro level. Spandana and some of the other private microfinance groups are unwelcome competition. More generally, opposition to money lending has been frequent in the history of both India and the West.

The government has abruptly shut down the branch offices of some microlenders, including Spandana, without respect for due process. There is talk of legally capping microfinance interest rates at levels...that would put many microlenders out of business. Such regulations would drive the poor back to the far more expensive private moneylenders and also to the state government.

That is Tyler Cowen in August 2006.

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