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Selling organs to pay off debt: Microfinance needs reforms

Governments and microfinance institutions must continue taking steps to reform the industry and provide the impoverished with a variety of financial services, including savings options and grants, which better meet their needs.

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Even with households that are not destitute, studies show that loans are only helpful as part of a larger package of financial services that includes savings.

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In the words of Nathanael Goldberg, director at Innovations for Poverty Action, “Randomized evaluations of microfinance are showing mixed results, with credit clearly not the panacea it has sometimes been made out to be, [and with] savings looking promising.” Last year's data from this group and others  show that the combination of credit and savings is more effective in helping poor households than credit alone.

Luckily, the microfinance industry has not turned a blind eye to this critique. The 2012 State of the Microcredit Summit report, issued ahead of this year’s annual conference in Madrid, states that to help microfinance “recover its soul,” these institutions should “encourage savings.”

Participants at the 2011 European Microfinance Week endorsed the "SMART" campaign, which has as one of its core client protection principles the “prevention of over-indebtedness.” And Mr. Yunus’s own Grameen Bank, more than 20 years after its founding, loosened its rules and allowed savings accounts for clients.

In addition, national governments are stepping up in to help provide financial services to the poor, especially savings accounts that are much less profitable for the private sector.

Earlier this year, Fiji began delivering all government payments to savings-linked bank accounts. In Peru, newly appointed Minister of Social Inclusion Carolina Trivelli announced that all recipients of public benefits will be provided with bank accounts to promote financial inclusion. Similarly, in 2011 Chile launched the “Chile Accounts” program to connect poor household to banks so that they can more easily use government benefits to build wealth.

The organ trade in Bangladesh existed before microfinance came on the scene, and it will likely continue as long as people are in desperate need of funds. At the same time, stories of Bangladeshis selling organs to pay off debt support the growing consensus that the poor are in need of many financial services, including savings, and that loans can harm as much as they help.

Hopefully, with the support of progressive and innovative governments, microfinance institutions will be able to better strike a balance between doing good and doing well.

Vishnu Sridharan is a program associate with the Global Assets Project at the New America Foundation.

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