Home > Uncategorized > The Role of Government in Microfinance: Lessons from India, and perhaps for Haiti

The Role of Government in Microfinance: Lessons from India, and perhaps for Haiti

Many of us involved in microfinance have long realized that government policies towards microfinance institutions (MFIs) and their clients matter.  But the experience of the last few years has dramatically illustrated this reality.

Previously, I have reflected on the upheaval in the Indian microfinance sector – with one state (home to the largest number of microfinance clients) passing a draconian anti-microfinance law, while the federal government has announced a strange mix of helpful, stabilizing, unrealistic, and contradictory polices.  I have compared this dynamic to the situation (and possible futures) of microfinance in Haiti.

Since then I attended and gave a keynote address at a meeting of Sa-Dhan, the oldest and largest microfinance association in India.  It was an energizing (and sobering) experience that I have just written about on the Grameen Foundation blog.

At the same time, I have learned of several overtures that the Haitian government has made to Fonkoze, Haiti’s leading MFI, to collaborate.  My first inkling of this interest was when I attended a meeting with the then-Prime Minister of Haiti in September 2011.  When we were waiting for the PM to finish a phone call and join the meeting, a Senator from the Central Plateau told the group how much he admired Fonkoze’s program for the ultra-poor after I introduced myself and my role in Fonkoze USA.  Depending on how such a collaboration was structured and implemented, it could be a great leveraging of strengths, or a disaster.  But at least the government is showing interest (though no major initiatives have been agreed upon yet).

Both the Indian and Haitian Parliaments are in the process of considering new legislation to regulate microfinance.  In India it has been drafted by a Parliamentary committee, while in Haiti is being developed by the Central Bank.  In both cases, technocrats who understand microfinance have dominated the drafting process based on what I have heard.  But even if this is the case, the potential for microfinance to become political football that elected leaders can demagogue for their own benefit is real – as we have seen so dramatically in the case of the Andhra Pradesh Parliament’s law.

The federal legislation in India gives the Reserve Bank of India powers to regulate microfinance as it sees fit – powers that the RBI does not seem to want.  The RBI’s uneven reaction includes signals that it wants MFIs to become banks or business correspondents for banks – neither of which are realistic options for most microlenders.  At the same time, RBI representatives imply that the unrealistic/impractical policies can be revisted in the months ahead (giving practitioners some hope).

BASIX Founder and CEO Vijay Mahajan

One of the most poignant moments in the Sa-Dhan conference was when Vijay Mahajan, the founder of BASIX, termed the actions of the AP government – which has destroyed a growing number of institutions and, according to recent research, driven many poor families back into the clutches of loansharks – as “Financial Vandalism.”  In fact, he is actually calling for a constitutional amendment to outlaw politicians from advocating the borrowers not repay loans they have taken out from financial institutions like MFIs.  I think he is serious!

Mathew Titus, the head of Sa-Dhan, asked for my speech and later many others did.  My focus was not so much on what government should do, but rather on how MFIs in India (and beyond) should reform themselves to leverage existing strengths, do better by clients, and make it easier for politicians to actively support them.

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