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Vol. 16, Jan/Feb, 2010
Global Viewpoints - Most Commonly Heard Misconceptions
Arjun Kashyap RECENT BLOGS
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Vol. 16, Jan/Feb, 2010

Contents Spandana Plans to Utilize Fund

THE POWER OF INFORMATION to Reduce Cost of Borrowings
Archives
Subscribe Jonathan C. Lewis founder of MicroCredit Enterprises (MCE), an organization that uses a Guarantor model to Workshop on Capital
leverage private capital for microloans, breaks the myths about how the world’s poor save, borrow and repay. Structuring and Equity Raising
in Microfinance Announced -
Jonathan C. Lewis Applications Invited!
Features
Founder, MicroCredit Enterprises
San Francisco, CA, USA More
News Board
Describe the three most commonly heard misconceptions about microfinance you have come across in
Publications the country/countries you operate in?
• “Microfinance is a panacea for the world’s poor.” EVENTS OF THE MONTH
• “The poor do not, cannot and will not save.”
Perspectives • “The interest rates charged by microfinance organizations are too high and are unfair to the poor clients they The Entrepreneurship Summit
serve.” What is the usual source of such misconceptions? 2009

Surveys
In general, a lack of understanding about microfinance, its clients and the market realities in which microfinance
Micro-Finance Summit 2009
operates are at the heart of these misconceptions. Much of the attention regarding microfinance in the last few
Resources years has focused on a few successful microfinance stories. This has been great for garnering support for
microfinance, but it has presented a glorified and narrow view of the microfinance industry, leading to Workshop on Capital
misunderstandings of what microfinance is, who it serves, and what its goals are. Structuring and Equity Raising
Events in Microfinance
What methods do you employ to
Classified correct people’s perceptions about More
microfinance?

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All it takes to correct misconceptions is
good information. MicroCredit Enterprises
disseminates information and tells the
truth about the enormity of the poverty
Subscribe
challenge and the microfinance role,
to E-Newsletter
which is the essence of building support
E-mail Address Moreover, we’re an open-source,
transparent organization. By doing so, we
hope to assist new players in the market
while encouraging others to operate in an
equally transparent way.
POLL

Would you say MFIs are serving the

Is microfinance the
really poor in the country/countries
new subprime??
you operate in?

Yes, it is headed for

a meltdown. Yes, most definitely. In general, microfinance is best-suited for the economically active poor. This does not
exclude the very poor, but generally means that those involved in microfinance are slightly better off than the
Not for the time
totally destitute. To avoid mission drift, MicroCredit Enterprises targets MFIs that focus especially on a country’s
being.
rural poor and with a higher number of impoverished women.
No, the two have
nothing in common.
Microfinance is not a truly profitable sector. Do you agree with this statement?
I wish I knew!

Yes. Some MFIs and some MIVs are profitable, many are not. There is a huge spectrum of MFIs, ranging from
Submit small village cooperatives to large regulated commercial entities. Some of these organizations are wildly
profitable, others barely cover their operating expenses, and others operate at perennial losses. The more
View Results pressing question that is less frequently asked is, “Profitable for whom?”

Advertising THE PERCEPTION PROBLEM

Tags
Ruth Dueck Mbeba, Microfinance Consultant, explains that misconceptions about microfinance often stem from
the ulterior motives of politicians and policy makers. By targeting the right group of beneficiaries and providing microfinance
clarity of information, MEDA (Mennonite Economic Development Associates) is proving that microfinance can be microfinance
both profitable and can bring about social change. social
equity
Ruth Dueck Mbeba financial
Microfinance Consultant, Mennonite Economic Development Associates technology
challenges
Lancaster, PA, USA
equity
insurance
Describe the three most commonly heard misconceptions about microfinance you have come across in microinsurance
the country/countries you operate in? private
• MFIs are only in it for the financial profit – there is no real impact of increased access to financial services for

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the poor. rural

• Microfinance is only about microcredit. Many institutions struggle with thinking and adapting to offer other Indicators
markets
financial services to their client.
test
• Many choose to believe or promote microfinance as THE solution for all poverty alleviation. Access to financia Africa
services is only part of a solution to poverty that requires governments to provide enabling environments, banking
stability, infrastructure and basic social services to its citizens. borrowers
capital
cgap
What is the usual source of such misconceptions?
More Tags
External stakeholders often carry and promote misconceptions about microfinance. Politicians or policy makers
use perceptions about microfinance for their own political agenda. There may be misunderstandings about the
WHAT'S NEW
delicate balance between social and financial performance. The commercial and development sectors often play
one against the other. MFIs and microfinance stakeholders themselves do not pro-actively communicate with
clarity. Further they also perpetuate misconceptions because of their own challenges or inability to innovate or Vol. 16 - Debunking the Myths
professionalize.
Dipal Barua on what Micro-
Finance needs from Cop15
What methods do you employ to correct people’s perceptions about microfinance?
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MEDA consistently promotes that business models can and must be applied to provide financial and socia Publications-
RSS Feed services to millions still living in abject poverty, facing limited opportunities and choices. We encourage socia Advertising/Sales/Sponsorship
Lead and Freelance Designer
performance where that is a gap, and encourage financial performance where that is a gap.
Microfinance Insights
Would you say MFIs are serving the really poor in the country/countries you operate in? Celebrates Three Years of
Launch
MEDA’s target market is always to work with the poorest of the economically active. By definition, this
Catch the SRIJAN 2009 debate
acknowledges that the poorest of the poor may be better served by social services and other supporting services
on Microfinance Insights
Many MFIs do strive to go down as far as possible on the economic ladder, but they will do so by balancing the
efficiencies, economies of scale and cost structures (urban vs. rural) of providing financial services on a
sustainable basis. Reaching the millions – partly rural millions who are the very poor - has been a challenge for
most MFIs. MEDA believes that more innovations must be explored to serve that market and serve it sustainably. Advertising

Microfinance is not a truly profitable sector. Do you agree with this statement?

Microfinance can and should be profitable. The donor grants of the 80s and 90s “proved the micro-credit
experiment” and helped to disprove the myth that the poor cannot pay. Today, the challenge is for effective and
viable microfinance services to pass the “commercial test,” proving that the sector can be served appropriately,
effectively and profitably.

BREAKING MYTHS TO BREAK EVEN

From the birthplace of Microfinance, Md. Khabir Uddin of BEES, gives Microfinance Insights the Bangladesh
perspective on myths in microfinance. With the view that myths about the sector can be broken using the media
to proactively educate and share information, Md. Khabir Uddin also states that the business of microfinance is
not intended for profit-making and should be run at break-even levels.

Md. Khabir Uddin

Deputy Director (Microfinance), BEES
Dhaka, Bangladesh

Describe the three most commonly heard misconceptions about microfinance you have come across in
the country/countries you operate in?
• The interest rate is higher than at a normal bank
• Some ultra poor are still outside of the program and due to inability of repayment some are dropping out.
• Poverty alleviation is not possible only through micro credit.

What is the usual source of such

misconceptions?

Traditional bankers, moneylenders,

some economists, and those who are
not involved with poverty alleviation
programs are usually the source of
such misconceptions.

What methods do you employ to

correct people’s perceptions
about microfinance?

Seminars; action research; and, case

studies of successful borrowers can be published in the print and electronic media.

Would you say MFIs are serving the really poor in the country/countries you operate in?
In Bangladesh most MFI clients are poor with few exceptions.

Microfinance is not a truly profitable sector. Do you agree with this statement?

I believe that the microfinance is not a profitable sector. It should be run on a breakeven level.

ENGAGE AND INTERACT

Ayan Chatterjee, an associate vice president at Arohan, comes down hard on bureaucrats, politicians and the
media for spreading myths and misunderstandings about the sector in order to serve their own private agendas,
without taking the trouble to learn the truth by going out and meeting the people in the field and talking to the
primary stakeholders.

Ayan Chatterjee
Associate Vice President, Arohan
Kolkata, India

Describe three most commonly heard misconceptions about microfinance you have come across in the
country/ countries you operate in.

A common misconception of many, especially those who do not engage with the financially underprivileged, is

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that lending to the poor must essentially be at cheaper prices and “MFIs are charging their clients extremely high
annual interest rates and are sometimes perceived as loan sharks.” This brings a lot of criticism to the sector.
Another key perception prevalent among promoters/investors entering the microfinance sector is that
“Microfinance is a “GET RICH” scheme.” It has extensive profitability and high recovery rates and is a relatively
simple sector to administer as well. The other common misconception, which I would like to touch upon, is that
“microfinance is essentially done with women.”

What is the usual source of these misconceptions?

With respect to the opinion that micro financiers are “loan sharks,” this perspective is mostly prevalent among
sections of people who don’t engage with the financially underprivileged, especially bureaucrats. In addition, as
poor people anywhere in the world are an important constituency of the opinion leaders and politicians there is
strong pressure on politicians to publicly demand that lending to the poor must essentially be at low prices.
The “microfinance is a get rich scheme” perspective has become inflated after the fast growth and financial
success of some of the new players has been brought to everyone’s attention because of the media playing up
the heightened interest of equity investors and consequent valuations. But in essence, microfinance is human-
resource intensive and requires us to be hands-on and close to the ground.
Misconceptions have also originated from the spectacular success achieved by MFIs of Bangladesh in
developmental work with women and from some inspired efforts on the Indian subcontinent. The initial work on
the subcontinent started with women and slowly the perception grew that microfinance is successful only with
women.

What methods do you employ to correct people’s perceptions about microfinance?

We strongly advocate that, to allay any misconception it’s best to visit the field to understand the circumstances
on the ground and talk with the primary stakeholders. So Arohan maintains a very open environment where
interested parties are welcome to visit its operations to build a perspective.

Would you say MFIs are serving the really poor in the country/ countries you operate in?

In India, MFI outreach is very low, that is, 5% as compared to 65% in Bangladesh. This critical data at once
explains that outreach is poor and needs to be further strengthened. Also most microfinance activities in India
are restricted to credit services, which are only a subset of the larger scope of microfinance work. Also, the group
and cluster approach in residential settings excludes the poor who are located at disparate locations and cannot
present themselves in residential settings (because of work timings or being migrant in nature).

Microfinance is not a truly profitable sector. Do you agree with this statement?

We do not agree to this assessment of the sector. Data from the MicroBanking Bulletin reports that 63 of the
world’s top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies
programs might have received, of about 2.5% of total assets. This compares favorably with returns in the
commercial banking sector and gives credence to the hope of many that microfinance can be sufficiently
attractive. Further, the senior managers of leading MFIs are seeking ways to dramatically increase operational
efficiency as well as using the outreach as a distribution structure for other products and services, which may
bring resources to strengthen the financial position of MFIs.

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