Microfinance/Microcredit – becoming profitable?

Posted by in India/Kerala

Surya points out that 2005 is the year of Microcredit. It is an interesting concept and I agree with her that this is going to be a big thing and will have a big impact in the future especially of Africa. We in India have had microfinance/microcredit in some form or the other for ages in the form of local money lenders and also the local cooperative banks along with what is known as chitti funds in Kerala (I am sure such schemes exists in other parts of India as well, don’t know what it is known as though.)

Microfinance became popular after the success of Gramin Bank of Bangladesh. Here you can read an interview with Muhammed Yunus, the founder of Gramin Bank.

Researchers at Wharton School now inform us that Microcredit is becoming profitable. This I think is a very good result. Large commercial financial institutions, including Citigroup and Deutsche Bank, ICICI and HDFC in India are now showing interest in microfinance, which could increase access to credit for the poor. One of the biggest changes this will bring about is improvement in efficieny of transactions. The biggest cost as one can imagine from the very term microfinance is transaction costs. If the big players enters this field – they will invest

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in new process designs and technology which will soon be available to all players in the market. This will indeed be a very good development.

Another development worth monitoring will be the reaction of existing players in the market – especially in the Indian context. Local moneylenders are very powerful in local context in most parts of India – politically, socially and economically. They will be using all sorts of tactics to prevent others from entering the field. But on the other hand their weakening could lead to tremendous social changes – particulary in North India – hopefully leading to social changes akin to what Kerala saw during the 50s/60s.