"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.

Moreover, clients have to meet requirements like monthly savings and collateral to be eligible for a loan. The more land and savings one has, the easier it is to access the larger loans needed for bigger businesses. The system thus risks reinforcing some of the inequalities that arise within a caste and class-based society. Those already better off are in a position to make better use of microfinance than poorer people.

Nonetheless, it seems all members of cooperatives do benefit from training programs to develop the skills to invest in fruitful income-generating activities and build the skills and confidence to confront difficulties. Microfinance can encourage people to transition from a 'passive' state to an 'active' state, and improve lives. Many women say their membership of cooperatives gave them a "voice" and made them more "assertive" within their communities.

There are many models of microfinance, but generally it allows quick access to cash at low interest rates for investment purposes or for emergencies. For the more vulnerable, despite the advantages of empowerment and training, failure can carry heavy risks. An unexpected consequence may be that those people with low incomes and limited access to outside resources may actually seek the help of private lenders in order to meet their microfinance payment deadlines, so as not to lose face.

However, microfinance appears to cater well to those people who have access to remittance funds or other resources. In these cases, microfinance has been a stepping-stone towards the betterment of lives.

Thouraya Bahri was a part of the Graduate Program in International Affairs, New School, New York.

Read also:
Earning from nature to pay for its upkeep, KUNDA DIXIT in KASKI
Unique cooperative puts a price tag on protecting the ecosystem
Opting for co-ops, PAAVAN MATHEMA
A cooperative response to cooperatives may help strengthen this third pillar of development