MUMBAI | Long heralded as an enlightened way to lift the downtrodden out of poverty, "microfinance" has come under a cloud. The stories of lives being changed by a $27 microloan and picture-perfect scenes of smiling women with colorful handlooms, empowered by affordable credit, have been replaced by headlines about borrowers driven to suicide.
At best, microfinance seems to be failing to achieve its most noble goal: poverty alleviation. At worst, some lenders are contributing to a cycle of indebtedness and abuse, just like the loan sharks they were to replace.
Critics say the microfinance industry has grown too quickly for its own good, with too much rapaciousness and too little regulation. That has fostered a breakdown in lending discipline, with multiple loans to overextended borrowers, and has allowed some unscrupulous players to thrive.
The controversy has hit hard the heartland of microfinance in South Asia. As India prepares charges in 51 cases of suicide allegedly linked to coercive microfinance institutions, the industry's founding father, Nobel laureate Muhammad Yunus, is fighting to hold onto his position as head of Grameen Bank in a Bangladeshi court.
Yet advocates for microfinance say it has achieved much despite the recent adverse publicity. They argue that extending credit to the poor — in practice most of the borrowers are women — has fostered small businesses, helped promote gender equality, lifted incomes, and improved access to food and education for some of the world's most desperate citizens. The backlash could unwind all that progress, they warn.
"To stifle an entire industry is wrong," said Vikram Akula, chief executive of SKS Microfinance, whose listing on India's stock market last year sparked fierce debate about how much profit is justifiable when helping the poor. "It is the poor who will ultimately suffer the most if they have to return to village loan sharks for financial services."
As the industry indulges in a spate of soul searching over what has gone wrong, some say microfinance is suffering, in part, from its own success.
Microfinance has excelled at getting a lot of money to a lot of borrowers quickly, disrupting established networks of power and patronage in the process.
In 2009, at least 128 million of the world's poorest families took microloans — up from just 7.6 million in 1997 — and investment funds for microfinance totaled more than $11 billion, according to a Microcredit Summit Campaign report released this week.
Some say that remarkable growth has prompted a backlash from vested political interests.
"The poor is a constituency politicians see as their own turf," said Alok Prasad, chief executive of India's Microfinance Institutions Network, whose 46 members represent about 85 percent of the lending in the sector in India. "Anything which leads to greater empowerment of the poor makes them insecure."
In Bangladesh, the government order dismissing Mr. Yunus — which he is now fighting in court — is widely seen as retribution for his 2007 attempt to form his own political party.
"The government of today wants to make [the bank] part of the government so that they can control it totally," Mr. Yunus said during a Washington news conference by video-link Monday. "I'm sure they see a lot of political advantage in doing that."
Mr. Yunus, who, in founding Grameen Bank in 1983, pioneered the concept of reducing poverty by making tiny loans to the poor, has himself been frequently critical of the commercialization of microfinance.
In India, some say pandering for voters, corruption and competition with a state-backed lending program helped spark a crackdown that essentially has frozen microlending in the southern state of Andhra Pradesh, India's most important microfinance market. The central bank had to step in to try to prevent microfinance institutions from going bankrupt.
Government lending programs for the poor in India have been losing ground to microfinance groups.
In 2007, state-backed self-help groups, which link local borrowers with banks, sometimes at subsidized interest rates, added 8.5 million clients, while microfinance groups added 3.2 million.
Two years later, self-help groups added just 6.7 million clients, while microfinance groups added 8.5 million, according to M-CRIL, an Indian microcredit rating agency.
M-CRIL Director Alok Misra said the gains by the private microfinance groups have shamed the government and unsettled politicians who believe the self-help groups are an important means of securing votes.
"It is showing the government its own inadequacy," Mr. Misra said. "That's a big challenge for the politicians. Politicians feel poverty lending should be in the government's name."
R. Subrahmanyam, principal secretary of rural development in Andhra Pradesh, dismisses charges of politicking as "a figment of the imagination of disgruntled elements."
"How can microfinance institutions step on political interests?" he said. "If poor are getting exploited and commit suicides by dozens, should government be a mute spectator?"
He said the state is preparing to prosecute 51 cases of suicide allegedly linked to coercive microfinance groups. Meanwhile the central bank is considering new regulations that would, among other things, cap microfinance interest rates.
"Irresponsible lending leading to multiple loans without due diligence, unproductive loans for consumption and consumer durables, lack of transparency in operations, usurious interest rates, coercive recovery practices, have all resulted in hyper-profits to microfinance institutions and impoverishment of the poor," Mr. Subrahmanyam said in e-mail.
Many within the industry would agree with that assessment and welcome better regulation.
The Microfinance Institutions Network plans to launch a microcredit bureau in India within a few weeks, which should help reduce the problem of borrowers taking too many loans.
The Microcredit Summit Campaign announced Monday an initiative to reward groups that do more to fight poverty — a goal that has proven maddeningly elusive.