Document Type



Accepted for presentation at at the 7th Cornell Inter-University Graduate Student Conference, April 2011.


Microfinance is the practice of originating small loans and capital infusions in developing countries to poor individual families and small businesses that are outside traditional banks. Today microfinance has grown into a multi-billion dollar industry that has stakeholders in the financial services industry, private international organizations (including non-governmental organizations ("NGOs")) and global politics. The successful initial public offering ("IPO") of SKS Microfinance, ("SKS") a for-profit microfinance institution ("MFI") in August 2010 marked the pinnacle of success for the theory that for-profit MFIs could eradicate poverty while simultaneously making a huge profit through microfinance. The extremely successful SKS IPO bolstered the idea that private industry and NGOs, not governments, should lead the effort to eradicate global poverty with for-profit microfinance being the tool to help reach the almost three billion unbanked people in the world and help further small-scale civil society and community development.

Events subsequent to the successful SKS IPO have intensified criticism of this theory and have also highlighted another narrative regarding for-profit MFIs generally and microfinance in India particularly: that for-profit MFIs, in an effort to sustain profits, have made irresponsible investments and have abused the very poor communities in which these companies were supposed to help eradicate poverty and encourage development. Since October 2010, the entire Indian microfinance industry has come under scrutiny due to the growing suspicion of for-profit MFIs and their actions in India. Andhra Pradesh, a state on India's eastern coast which has more borrowers than any other state in India, is facing a microfinance credit crisis, because of a severe decline in the recent level of repayment of MFI loans. According to the international press, the situation in Andhra Pradesh is threatening to become the Indian equivalent of the 2007-2008 American subprime crisis. Many international news sources, including the Wall Street Journal, Times of India, and the New York Times have published accusatory articles linking the rise of for-profit MFIs to a microfinance loan crisis in Andhra Pradesh, and suicides and community banishments. In response to these allegations, the Andhra Pradesh state government rolled out An Ordinance to Protect the Women Self Groups from Exploitation by the Micro Finance Institutions in the State of Andhra Pradesh and for the matters connected therewith or incidental therefor, which soon after became a law of the same name ("MFI Bill"), which regulated the lending practices of MFIs in Andhra Pradesh. While government regulation is an important and necessary element in correcting the damage, the MFI Bill, as it stands today, has serious limitations in its approach to the microfinance situation in Andhra Pradesh and does not adequately address the situation.

The MFI Bill is not a panacea that will cure microfinance abuses in Andhra Pradesh. Instead, the microfinance community in Andhra Pradesh state would greatly benefit from (in addition to government regulation) a legal accountability system that relies on public accountability, transparency and the enlightened self-interest of companies, labor and civil society to initiate and share substantive action. Regulating the microcredit companies while still allowing them to function and grow as private enterprises poses an important new challenge for government authorities, the financial industry, broader civil society, and other stakeholders. The emergence of new vehicles for delivering financing to inhabitants of developing countries is part of the fragmentation and realignment of the institutional landscape of foreign aid as well as part of the landscapes of international law and corporate social responsibility. Devising an appropriate framework to encourage the microfinance sector's growth potential, while ensuring financial stability, sufficient governmental control, and on-the ground solutions for local stakeholders is necessary. This framework must address the growing role of private companies, particularly the financial services industry and NGOs in the day-to-day operations, while also still engaging state and local government and affording them opportunities to regulate and protect its citizens. Such a solution I believe is best articulated through the United Nations (UN) Global Compact and Special Representative of the Secretary General (SRSG) John Ruggie's Protect, Respect, Remedy framework.

The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with universally accepted principles in the area of human rights, labor, environment, and anti-corruption. I believe that it is this framework that best articulates the collaborative nature and social enterprise elements of microfinance as the Global Compact is the expression of a global wish for companies to assume global responsibility. This paper examines (1) in the history of microfinance generally and India as well as a brief history of SKS; (2) the two main types of microfinance organizations in India, MFIs and SHGs and the competition between SHGs and MFIs and its effect on the MFI Bill; (3) an evaluation of the MFI Bill; (4) an evaluation of the UN Global Compact Protect Respect Remedy Framework as a possible methodology that would improve the Indian microfinance industry.

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Microfinance institutions, Self Help Groups (Finance), Andhra Pradesh, India, Protect, Respect and Remedy Framework, United Nations Global Contract