By Tamsin Harriman at the Common Interest Foundation

Microfinance initiatives (MFIs) have largely been very successful in helping the poor around the world. However, there are occasionally some problems. One especially serious problem that MFIs can face is corruption. Since their clients are poor and often uneducated, it is easy for staff to take advantage of them. In fact, this is one of the reasons people get involved in microfinance to begin with - to stop poor people from being taken advantage of by moneylenders. Unfortunately, there are all too many possibilities for MFIs or their staff to engage in corrupt behavior themselves.

In Benin, West Africa, NGOs subcontracted by a large MFI have reportedly been taking bribes from borrowers and engaging in other corrupt activities. Due to rapid growth, the MFI has not been particularly scrupulous about the NGOs it subcontracts to. According to the above article, the MFI's director Komi Koutche says that "subcontracted local community associations are benefiting from borrowers’ desperation. 'Instead of taking US$2 in processing fees, they are charging [borrowers] up to $7. As long as the borrowers pay this willingly, we cannot stop it. It is only when they protest that we can intervene.'” They are also keeping funds that should be remitted to the MFI: "[According to] Benin’s Minister of Microfinance Reckya Madougou [...] recent studies revealed that loan intermediaries 'collect loan payments from borrowers promising to remit them to the fund’s partners [banks], but then do not do so.'”

Another form of corruption sometimes seen in MFIs is the use of extreme methods to coerce defaulting borrowers into repaying their loans. As detailed in the book What's Wrong With Microfinance? by Thomas Dichter and Malcolm Harper, pressure tactics can become so bad they could be considered bullying. In extreme cases, staff use tactics such as sitting outside defaulting borrowers' homes and refusing to let anyone in or out until the borrower repays her loan. Of course a high repayment rate is important for an MFI to be sustainable, and thus to continue helping the poor, but this is no excuse for such harrassment.

If commercial banks treated borrowers in these ways, it would be a major issue, covered by newspapers worldwide, and the bank would quickly lose all of its customers and quite likely be taken to court. Unfortunately, as in the Benin case above, corruption in MFIs goes largely unreported, as the poor people they serve depend on them and have no other options - if they need access to financial services, it's the MFI or nothing (except perhaps a moneylender who charges exorbitantly high interest rates).

Corruption in any organization is bad, but in an MFI it is especially so, since it perpetuates the helplessness that comes with being poor. MFIs should seek to alleviate poor people's helplessness, not to exacerbate it. Thankfully, corrupt practices are fairly rare in microfinance. Even so, MFIs should encourage their clients to speak up if an MFI staff member is doing something wrong. Hopefully if borrowers understand that it is okay, and even good, to speak up in such cases, then those who wish to take advantage of them will no longer be able to do so.