On this topic    
> Measuring the Impact of Microfinance - study from Grameen Foundation
> CGAP on Andhra Pradesh - World Bank study on India
> Help Microfinance, don´t kill it - major economists in defence of microfinance
> Small loan, big snag - Financial Times article December 2010
> India microcredit faces collapse from defaults - New York Times November 2010
> Microlenders, honored with Nobel, are struggling - International Herald Tribune January 2011

Recent criticisms

Over the past 10 years a large number of microfinance institutions have scaled up their operations and considerably improved their financial performance. Increasing commercialization has allowed many of them to reduce their funding costs by accessing the capital markets.

However, increasing commercialization has also attracted a number of criticism and some political backslash which were basis for increasing number of negative press coverage. Main criticisms to commercialization include:
  • Mission drift: private owners pushing institutions to maximize profits rather than focusing on social impact
  • Lack of scientific evidence of impact of microfinance on low income communities
  • High interest rates charged by microfinance institutions
While excessive commercialization has led in some cases to poor social performance – in most cases, profitable institutions have had the advantage to scale up their operations quickly and reach more people by reinvesting its profit. High interest rates are often a result of the high cost of personalized service of microfinance credit methodology rather than an indication of high profit.

More recently, following the successful Initial Public Offering of SKS in India in June 2010, the government of Andrah Pradesh, SKS´ native state, has introduce new regulation that penalizes current microfinance institutions with the objective of addressing concerns around over-indebtedness of clients, unethical collection practices and high interest rates.

New regulation retroactively waived loans where a sum of twice the principal had been repaid, required that repayment collections occur at offices, and added onerous regulation that requires registration of microfinance institutions or MFIs with district authorities who may, at any time, cancel it. As a result of the new regulation and of populist politicians who have invited clients to not repay their loans, microfinance institutions in the region has suffered severe losses and inability to access funding.

International financial institutions such as the World Bank, academics and practitioners believe new regulation rather than offering protection, it will hinder the availability of financial services for the poor making them worse off.

If you are interested in learning more about financial inclusion visit our resources page.