Microcredit in India: Proposed shift to faith-based non-profit social enterprise model

Abstract

This report attempts to analyze the microcredit scene in India in terms of poverty alleviation and highlight the issue of ‘mission drift’ they are either facing or voluntarily venturing into. In an attempt to attract investors MFIs have started lending larger loans to unbanked, not-so-poor clients charging exorbitant interest rates. This is in contrast with their very mission of poverty alleviation. This report challenges the growing commercialization and profit-orientation of microfinance in India and subsequently proposes a new, working, non-profit and faith based model as a possible solution to afore- mentioned challenges. The new model as practiced by Lifeline Microcredit Foundation Trust (LMFT) in Bangalore is based on Islamic principles of charging ‘no-interest’ on loans lent to poor while following Grameen model to the tee. It also implemented several new innovations in the current model in order to enhance its reach and efficacy. It doesn’t attempt to attract investors rather it operates on donations received from local philanthropists in the concerned areas. It works with the help of employees hired from the same slum areas and volunteers who expend at max 10-12 hours a week. All these practices help reduce its cost and hence offer loans at a meager interest rate of 7-8%. This is an attempt to show that there is a need to focus on the true spirit of poverty alleviation by moving towards non-profit and mission-driven institutions instead of exploiting the poor by giving them an option to choose between the lesser of two evils. Moneylenders, existing MFIs and proposed model are subsequently compared on a framework of parameters to show how the proposed models is effective in its true spirit of poverty alleviation. The inferences are corroborated by the success stories of clients who switched from money lenders and other MFIs to LMFT.