"I am thankful for microfinance because even though I am in great debt and struggle to pay for food, I was able to save my daughter from sickness," Sita said. She had borrowed Rs 200,000 from her Chitwan cooperative last year to pay for emergency treatment for her daughter, and is still struggling to pay off her debt.
The original idea behind microfinance was that the poor could potentially escape poverty by freeing themselves from local moneylenders who charged high interest rates. The low interest rate could be also used to build a business to sustain their families.
Microfinance has become an integral part of the government's poverty reduction strategy in Nepal. In 2004, there were 2,345 saving and credit cooperatives and thousands of NGOs working in microfinance. Many of them were encouraged to provide financial services beyond credit and savings and form groups to rely on the internal resources of members' savings to generate loans for members.
Today, however, many have come to question the role of microfinance in developing nations in alleviating poverty and helping the poor improve their lives. Analysing cooperatives in Chitwan and Butwal recently, it was clear those accessing microfinance services paired with other financial resources, such as remittance transfers from abroad, did benefit.
However, for the 'poorest of the poor' microcredit loans can actually make things worse. They become even more vulnerable to the point where, in some cases, they struggle to pay for food and basic household expenses. A woman who had taken a loan to buy a goat was in repayment difficulties because the goat died before it provided additional income to the family. In such cases, it is difficult for borrowers to maintain daily expenses, meet the saving expectations required for the membership of the cooperative, and deal with loan repayments.
Many loans are taken to deal with health-related issues, a fundamental need in a country where over 14 per cent of children die before the age of five. Hospital fees can be expensive, resulting in substantial debt. Very poor households, like Sita's family, often find themselves in a trap, and microfinance is used for medical emergencies rather than income generation. If the government provided better healthcare services, perhaps microfinance could alleviate poverty more efficiently.