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The Microfinance Fracas in Developing Countries

BY: Sathish k Paul | Category: Finance | Submitted: 2010-10-20 12:27:55
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Article Summary: "Microfinance is a good thing to happen if it is handled correctly. If it is not, it can lead to problems like in India..."

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The banks and other financial institutions that are present all over the world will not be able to take the burden of the small and medium sized farmers in the developing nations. This was the reason for the microfinance market to develop. Microfinance is a method of lending to the poor farmers in the country at a rate that is supposed to be lesser than the normal rate. There are various advantages of microfinance. On the other hand, the micro financing method can also be misused as was seen in India recently.

The microfinance industry in the developing nations has been growing by leaps and bunds. There are various reasons for the rapid growth of this industry. There are various small sized farmers who have a hand to mouth existence in the developing nations. The reason for this is that they are not able to break out from the rut they are in. they have to take a loan to buy the seeds for the planting. Then, when they do harvest, they have to pay off the loans. They just have enough to eat as a family.

In this situation, is the rain fails, they go at a loss because the loan that they had taken to buy the seeds. When they are not able to repay the loan, which is bought at an exorbitant rate, the amount just keeps increasing. Finally, they have to sell off their land and they are left with nothing.

This is where the microfinance industry comes in. Ideally, they are supposed to provide the loan to the farmers at a rate that is nominal so that the poor farmers in the developing nations need not go into debt. The rate that they offer the loan should be less than that of the moneylenders who give the loan to the farmers at a very high rate. On the other hand, they are also able to provide loans to the farmers, who are not able to get the loans from the banks.

The microfinance companies take the role of the financial institutions that should be helping the farmers on behalf of the government. The whole process started going wrong when the microfinance industries started getting listed on the equity markets. As they got listed in the markets, they had to show profits to the clients who invested in the company. When the people who borrowed money from the farmers were not able to pay back the money to these microfinance industries, the industry started using threatening methods to overcome the non payment of the dues.

The threats and the various other methods that were used by the industry started to take a toll on the people in the villages who were poor and already starving and suffering because they were not able to get any crop from their farms. As they were further terrorised by the industry that appointed goons to try and recover the money, the farmers were made to get to a corner from where there government is now trying to overcome the problem by setting guidelines for the functioning of the microfinance industry that is now seen to have no difference from the traditional money lenders who used to cause suicide death of farmers because of their lending to them at very high rates.

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