Micro Finance Institutions become monsters

Microfinance Institutions which have been lauded as new age messiah for the poor and downtrodden have turned out to be monsters with inherent faults in the system. It is high we checked its acvitities as it is eating away into the vitals of our economy.

The micro finance institutions borrow huge sums from commercial banks at low interest rate and lend it to the poor people on several conditions. The interest rate is high and repayment is very harsh. In some instances, which were brought to the notice of CORPORATE FRAUDS WATCH SOCIETY, poor women who are dragged into the web of easy finance are forced into untoward conditions to repay the loan. To be frank, they are asked blatantly to become prostitutes to repay the loans. Now corruption has become rampant among micro finance institutions, it is high time the officials reviewed the situation and verify how some people are lining their pockets and how the gullible are being dragged into the web.

Many microfinance institutions (MFIs) operate in ‘difficult’ countries with a weak rule of law, open and latent conflicts, and corruption affecting everyday live. Social and private investors who finance MFIs may therefore be concerned about the benefits of their engagement and the sustainability and profitability of their investments. Obviously, there is no corruption-free world. Corruption may occur in an MFI as it may in any other type of company, organisation or government institution. Empirical experience, together with the theoretical line of reasoning, however, provide good reasons to assume that corruption in MFIs is not a big issue. How are MFIs affected by corruption (and money laundering)? How do they deal with this situation? And what is the appropriate benchmark to evaluate the outcome?

Corruption and money laundering - Definitions
Corruption is commonly defined as the abuse of official power for private gain or, more generally, the misuse of a position of trust (within administration, private and public companies or politics) for a dishonest personal benefit. The main forms of corruption involve bribery, embezzlement, fraud and extortion. Depending on the focus, corruption may also take very subtle forms, such as attending unnecessary seminars or conferences implying higher inefficiency within the company or institution. Sometimes corruption is even understood in a very broad context as “something against law”.
Money laundering refers to the act of concealing the origin (source and identity) of funds, either because funds have been generated by illegal means or because they are subject to reporting requirements that involve paying taxes and other duties. Money launderers may operate through financial systems or fictive companies and transactions. In particular since 9/11 concerns about terror financing have gained a lot of attention. There are different levels where
corruption may affect MFIs directly and indirectly The most probable type of corruption and financial crime that might occur at MFIs is fraud. Although fraud occurs in all business sectors, institutions dealing with finance are specifically exposed to it. Loan officers and managers may make fictitious loans, transfer funds into their personal accounts, receive bribes or simply steal cash .
Corruption-related concern may also be linked to the ownership structure of an MFI. Non-governmental organizations (NGOs), for instance, tend to be more focused on social benefits rather than financial outcomes and profitability. As majority shareholders in MFIs they may on average demand less stringent internal controls than private, profit-maximizing owners and thereby unintentionally open doors for fraudulent behaviour. By contrast, other people argue that NGOs often have a social and church-related background bringing in higher moral standards and therefore less corruption. Last but not least, corruption may origin from activities
of MFI owners themselves, abusing MFI lending for their own mission or political agendas, for instance, granting loans to buy votes. This type of political corruption has not been a big issue but has occurred in some cases where governments have been direct or indirect owners of MFIs.