Ten Commandments for Responsible Microfinance

by Dr V. Rengarajan

Microcredit and microfinance (MF) are not the same product. While  MF represents a comprehensive package including various financial services like  savings, credit, insurance, transfer of cash, ( of late micro pension also) etc., along with credit plus/non financial  services such as  capacity building, on the other, micro credit becomes  one of the components  of MF and micro credit  cannot be a true substitute literally for the term MF.   Calling micro credit as MF is a synecdochical expression. Most importantly, microcredit albeit necessary, is inadequate for fighting poverty without any supporting services. In the same vein, the provider of microcredit services only justifiably called as microcredit institution (MCI) and not necessarily as Micro financial institution (MFI). True to the term MFI, there is no existence of MFI providing all MF services holistically (see below).

Mere micro credit lending cannot be equated with Microfinancing being the fact erroneously practiced by MF players and found in all the literature pertaining to MF. The problem is that both researchers and the practitioners in MF have very limited assumption of ‘causality’ in the process of income generation and empowerment through Microcredit.  To put it specifically, what is strongly postulated   is that there is causal relation between micro credit and income generation and eventually poverty reduction.   But, in most cases this assumption in the demand side has been proved wrong, since microcredit input alone cannot do the magic without adequate supporting services for bringing in desired outcome and impact. At the most microcredit can be consumption smoothing but it cannot help in reducing poverty instead it would aggravates the problem of debt stress to poor clients. Evidently, multiple lending and multiple borrowing have over heated the household economy in the demand side (client side) leading to the MF crisis witnessed in many countries in Asia and Africa. Persistence of poverty and inequality, twin scourges of humanity remain without strongly challenged.

Microfinance is a unique credit model that allows capitalism in a social context by creating an optimal mix of profit motivation and social entrepreneurship. Sometime the latter is compromised for the sake of former. This merging of two traditionally divergent philosophies makes microfinance therefore a delicate balancing act, which increases its vulnerability to criticism on ethical grounds. How do we resist this magnetic pull away from our original ethical values micro finance in the process of poverty cure?

Microfinance can be respectful and also ethically reverential or honorable too ‘if done rightly” which is feasible through adoption of these ten commandments by microfinance community. Accordingly, this framework has emerged in the form of ethically oriented ‘Ten Commandments’ for the use of MF arsenals serving as covenant to motivate the microfinance community for adapting ethical codes while performing various tasks right from the planning towards the ultimate goal and effectively to harness the hidden development potential of micro finance for the welfare of the marginalized people.

The Ten Commandments for Responsible Microfinance:

1. Prudential perception on capability differentials of the target people 

2. Adoption of ‘Equity’ principles for candid inclusiveness in the battlefield 

3. Strategic product tool planning tailored to the needs of the target group and to potential of the given area

4. No first use of silver bullet ‘micro credit’ in the process of graduation of the most vulnerable and disadvantaged people (ultra poor ).

5. Sequestered micro credit is like forbidden apple and one should not be succumbed to temptation for conspicuous consumption. Saving led approach is ideal for the bottom pyramid.

6. Value addition to micro credit by integrating with adequate financial and non financial supporting services to regain the inherent potential for serving the poorest

7. Welding the MF tools together (integrated product) for multiple attack on various social contingencies forcing poverty ratchets at poor man’s household level.

8. Group approach –Collective endeavor for mutual benefit: Nurturing with the motive for sailing together for sharing gain and sacrifices equally without sinking together 

9. Ensuring ethically coded customer protection principles to the poor target group without dropping out in their growth trajectory.

10. Moving towards local indigenous participatory financial system for sustaining ‘self help’, ‘self reliance’, ‘self esteem’, ‘self satisfaction’ at the end of the battle

An illustration on holistic ethical approach for poverty cure through responsible microfinance is given in Box 1. The process includes various tasks such as prudential perception on capability  based market segmentation , and sequencing integrated inputs tailoring the needs of the target group in different layers in pyramid

Box 1 Segmentation in pyramid and integration of inputs 



Dr V. Rengarajan received Doctorate in economics from   Pondicherry Central University. M Phil  from university of Madras. Served as researcher in Economics Department in University of Madras for 10 years,  and in Madras Institute of Development studies (MIDS)for 2 years. As a senior economist, in charge of Economic Research dept in a nationalized bank (Indian Overseas Bank) formulated District Credit Plans and conducted a number of research and evaluation studies pertaining to financing for rural area development and micro financing for poverty reduction programmes for 25 years. As a professional international consultant in Micro finance, for APRACA / IFAD (Asia Pacific Rural and Agricultural Credit Association Consultant Services,) Jakarta, Indonesia.. and Agricultural Finance Corporation Ltd,(AFC) Mumbai, India as state consultant  , conducted evaluation and research studies connected to microfinance in  many Asian countries. . Advisor to a national NGO for research and evaluation on Micro financing and SHG programmes in Tamilnadu and Jharkhand states. Invited for guest lectures in national and international universities  and as resource person for international workshops. Presented about 70 technical papers on rural banking and micro financing in national and international conferences /seminar/workshops/.Publication includes six books including the latest “ Micro finance  Principles and Approaches – Ten commandments for responsible financing to the poor” and about 50 papers in technical journals Also acted  as visiting professor to Mrs. Helena Kaushik women’s PG college in Rajesthan .Currently consultant to NGO Hand in Hand Chennai for preparation of district level Human Development Report.


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