The Local form of microfinance works best in Indian communities.

Microfinance was once the holy grail of development policy, a panacea for poverty delivering financial inclusion, sustainable income and social empowerment for the world’s poor. In India, the nation’s women were to reap the benefits. Where social norms limited female access to employment and credit from traditional financial institutions, small, low-interest microcredit loans would promote enterprise and provide seamless transfer of benefit to India’s millions of malnourished children, a third of the world’s total.

This golden ticket of cash, dignity and opportunity was – perhaps inevitably – too good to be true. A Nobel Prize-winning idea founded upon admittedly noble principles has evolved into a sprawling, largely unregulated sector of charities, collectives and profit-making lenders, with wildly different interests (and interest rates). Twenty-five per cent of Bangladesh’s population hold microfinance accounts. In the Indian state of Andhra Pradesh, where the figure is 17%, a reported eighty people committed suicide in 2010 after defaulting on microcredit loans.

Part of the unique appeal of microfinance is a sense of personal connection, offered by international organisations that provide funding for local microfinance institutions (MFIs). Websites such as KIVA, offering personal profiles of potential entrepreneurs, allow Western donors the rare luxury of choice in selecting the beneficiaries of their ‘life-changing’ contribution. Recent controversy about KIVA’s funding process – that money is given to beneficiaries before, rather than after, a Western benefactor clicks through their profile – highlights the problem with the myth of face-to-face connection. Western donors don’t, by and large, know enough about microcredit or the individual circumstances of people in poverty to make an informed decision to donate. The cherished sense of connection is largely an illusion.

That the Western media has changed its mind about microcredit is unsurprising. A spate of reality checks and sober reckonings transformed the industry from darling to suspect, as critics highlighted a lack of concrete evidence for the wider benefits of micro-loans. But generalisations of either type do not reveal how microfinance has affected those in poverty in India and beyond. To be ‘against’ – or ‘for’ – microfinance in general is to ignore the particular impact schemes have had on a local level, for better or worse.

As with much in the development sector, it is on the local level that microfinance is best assessed and implemented. Building the relationships required to understand the specific needs of beneficiaries requires time and commitment, rejecting general theories and a one-size-fits-all micro-lending mentality. Vetri Velan, a development worker with ten years’ experience at Sharana, a small non-governmental organisation (NGO) in Pondicherry, emphasises the importance of connection and trust in setting up the charity’s microcredit programme in neighbouring village Angalakuppam. Building relationships within the village required several years of field visits, undermined by continuing attempts by local money-lenders to disrupt the scheme. Velan believes the Sharana scheme is truly unique, and has had lasting impact in the village, allowing women to “jump, by education and economics” the hurdles that disempower them.