Monday, January 24, 2011

Caps, Drugs and Microfinance

(as posted on

Of all the arguments I have heard in support of rapidly scaling microfinance the one I have heard the most is that there is huge demand for money among the poor. Of course there is huge demand. The less you have of it, the more desperately you need it – to tide over the pain and struggle of every day. The next meal, school fees, doctor fees, a pair of shoes, a movie to escape from reality, a drink or two to forget. It’s a painkiller.

When you’re in severe pain, you need a painkiller. What you care about is relieving the pain now. Today. When you are in desperate need of money you don’t have, and it is dangled in front of you, you will take it. But painkillers are insidious.

A friend of mine in the USA once began taking the painkiller Vicodin for severe chronic back pain. Having had a small back problem myself once, I know the pain can be paralyzing and nothing else matters but getting rid of it right then. He took only what the doctor had prescribed for him and for a few weeks it worked. But over time, the effects began to wear off sooner. So he began taking his next dose a little sooner. Before he knew it, he had used up his entire prescription a few weeks too soon. His doctor refused to give him a new one so he went to another doctor. And then another. Then to anyone else who might have a supply. When he didn’t have it he was unable to sleep. He had night sweats, his heart rate often went up, he had episodes of trembling and he went into depression. It was unbearable. He was fortunate to get help. Some painkiller addicts commit suicide. Overdose is also common and can lead to death. In the United States, there are over 400 documented deaths a year resulting from painkiller overdose.

Addiction is not the norm though. The people who are likely to get addicted to painkillers are those that have prolonged and severe pain. Not those with a short lived problem. There are also certain personality types that are more prone to addiction and irresponsible behaviour. So also for microfinance. The people who are poorer need it more desperately and borrowed money goes in just tiding over day to day expenses. Once spent, it is harder to pay back on time. Moreover, once you have a brief alleviation of pain – being able to pay for a doctor when your child is sick, or even being able to buy a tasty sweet to add to your meal - it is hard to go back. There is no alternative but to get more money by taking more debt. When you have mounting debt burdens that mean higher repayments and when you can’t get the next dose of debt soon enough to tide you over, the withdrawal can be almost the same as withdrawal from painkillers – insomnia, trembling, elevated heart rate and depression. Sometimes suicide.

So who’s to blame for the suicides? The microfinance lenders? The desperate or sometimes irresponsible borrowers? What is the right balance between justifiable borrower need and abuse? Like pain level which is highly subjective and can only be judged by what the patient reports, the need for money and ability to make use of it productively is also based on highly subjective self reported information. Who’s to know for sure? How do you dose appropriately?

The Malegam Panel report is just out with a host of recommendations for how to regulate the microfinance industry to put an end to practices of abuse and misuse. Cap the maximum spread so that profits are limited, cap the maximum interest rate, cap the maximum loan amount that can be given to any individual, cap the number of microfinance institutions that can lend to any individual, cap the fraction of loans that can be given for any particular purpose. But is capping the answer? What about a commitment to patient education? A requirement for lenders to provide not just complete and transparent information on the dosing (here the effective interest rates and costs) but also the risks presented in an easy to understand way? A public awareness campaign to communicate the risks and benefits of borrowing? An investment in financial management counseling for borrowers?

Instead of caps that curtail the abuse but also the benefits, what about finding ways to give the power to the people.


  1. Any addiction is bad and am totally with you on the educating the masses bit.

    Another fall out of the Malegam report could be that the smaller MFI's who will have challenges with access to funds, since they wont be priority sector because of their size may drop out the business. Those who are truly interested in helping the poor may switch to the banner of NGO and those who are in this business for profit alone may die out. I am curious to see how many orgs will be keen to help the poor and how many are there just for profits.

  2. A question to you doc,

    This eloquent expression in the favour of the micro-finance industry though wants my lit savy heart to sway in its favor, but my science loving brain asks a question through another analogy.

    If one of my two kids (and this is really a huge assumption, I am just 22 :P), is not faring too well in his academics due to a some mental illness does it help to give him 10,000 encyclopedias to read or does it help if I take him to a facility (away from his friends which he dislikes and hates me for) which treats his mental illness.

    My point here is that is providing easy access to fund not like giving the kid a candy as a treat for excelling in his exams, even when u know he cant.

    For me the only solution to help the poor is to educate them and not provide them with money. If instead of "thoda paisa", this county focuses on "thoda gyaan" we would (again in my opinion) be looking at a more sustainable way of eradicating poverty.

    Hoping to hear from you doc.

    An aspiring physicist of poverty.

  3. Abhinav, I agree with you. "Thoda gyaan" is a more sustainable way of eradicating poverty. For this very reason a lot of what we do is focused on facilitating faster flow of knowledge and information (see for instance earlier posts titled, 'Of Mind and Money', 'Potential Money' and 'Go on! Innovate!'). That said, "thoda paisa" has its use and in this post I am simply advocating to give people "thoda gyaan" about the "thoda paisa" to empower people to make better decisions about taking debt rather than straightjacketing lenders.

  4. A little late but hopefully relevant. Talking about suicides among MFI borrowers, don't you think there is a need to place this in the context of the suicide rate for the population as a whole and then see whether there is a significant statistical deviation. I make the point because SKS, for instance, has about seven million members. Assuming an average rate of 20 per 100,000, about 1400 borrowers would commit suicide even without any "extra distress" attributable to the MFI. Incidentally, the suicide rate in Kerala is about 30.

  5. Okay, I think I am a little unclear about what the "suicide rate" for a particular population group really implies, and my back-of-the-envelope calculations may just be out of line. Perhaps someone who knows statistics can look into it.

  6. Ranjan, I agree with you that the analysis should be put in the context of suicide rates overall. I think the issue however, is not how many suicides there were overall but how many were attributable to debt. Debt burden and financial woes are a common reason for suicide. That said, it is not likely that you could statistically attribute it to one lender over another. Rather it sheds light on the general issue of microfinance debt not always being some panacea for poverty.