On 11th November 2013, the World Bank has released a global financial development report on financial inclusion. Simply financial inclusion means the use of financial services by proportion of individuals and firms. The focus of this report is on how financial inclusion can significantly reduce poverty and boost shared prosperity. This report highlights that financial inclusion must be carefully designed as promotion of credit without careful monitoring would likely to result to crisis. This irresponsible financial inclusion due to overextension of credit to the poor has led to a number of crisis, for instance India’s microfinance crisis in 2010 and Bosnia and Herzegovina’s crisis in 2008 (World Bank, 2014). Though Islamic microfinance has yet to made its mark in such a report, it is timely for Islamic microfinance to ponder on lesson that could be learnt from such crises and assess its performance.
Commercialisation of microfinance institutions (MFIs) with excessive profit-orientation had been cited as the main cause for the problems in the conventional microfinance industry. The move to maximize profit drives unhealthy intense competition within the industry. This in effect causes interest rate to go up hence heavily burdening the poor borrowers (Lützenkirchen and Weistroffen 2012: 5). Muhammad Yunus (2010) who founded the Grameen Bank in BAgladesh states in the New York Times that:
“Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity”
The case of Banco Compartamos in Mexico and SKS in Andhra Pradesh, India are classic examples of the perilous effect of excessive profit-orientation. Even though Banco Compartamos succeeded in increasing its numbers of borrowers, its financial success raised serious concerns over its balance between its social and commercial objectives. For example, it lends small amounts at very high interest rates of up to 80% in nominal terms and even reaches to 130% effectively according to some estimates. One fourth of the interest income is retained as profit which allowed Compartamos to increase equity capital on average of 53% per year. When this company went public, it was revealed that a substantial transfer of wealth was taking place into the pocket of its shareholders (Lützenkirchen and Weastroffer, 2012: 6).
Andhra Pradesh is being one of the most saturated and competitive microfinance markets in the world. Over time and in order to strive in this type of market, the industry made a big shift in its approach – from a social mission to an aggressive commercialisation approach, Incentives for the microfinance staff were set accordingly: People from the top management to the loan officers were strongly incentivised to achieve fast growth and raise profits. As a result, its loan book expanded whereby an average debt outstanding per household was more than eight times higher than the national average, with 84% of households taking out more than two loans the median household four. At the heights of its boom and due to the mounting criticism, the government of India published a report listing names of 123 victims of private MFIs and investigated 76 cases where loan officers were blamed to have driven over indebted borrowers to suicide (Lützenkirchen and Weistroffer, 2012: 10). According to Microfinance India: Social Performance Report 2011 (Desai et al, 2011: 9), there were 9 million households in Andha Pradesh on the defaulters list of the National Credit Bureau. In response, the government imposed strict regulations which led to temporary freeze of the market.
