Microfinance Profitability vs. Financial Health: A Deeper Look

As financial statements for the end of Asar are being released, microfinance institutions show a picture of increased profits, reduced bad loans, and improved financial indicators. The microfinance sector, which has been struggling with crisis, criticism, increasing borrower debt, multiple loans, and recovery pressure for a long time, is now returning to its rhythm, which is certainly a positive sign. Financial institutions becoming profitable is not inherently bad; rather, profit is a necessary condition for a healthy financial institution. However, the main question today is not just whether there was profit. The question is—on what basis was that profit made, and how much did it impact the borrower's life? This question compels a deeper look into the bright financial statements of the end of Asar. When criticizing the microfinance sector, its contribution should not be forgotten. Microfinance plays a significant role in connecting rural and low-income families, who are far from the reach of banks and financial institutions, to the formal financial system, developing a savings habit, providing capital for small enterprises, and especially increasing women's economic participation and self-reliance. For many families, microfinance has been the first formal financial door. Many women have gained the confidence to conduct financial transactions in their own names. Small businesses have received capital. Opportunities to participate in economic activities have increased. Therefore, it would be unjust to make the microfinance sector synonymous with crisis. However, acknowledging its contribution and questioning its shortcomings are not contradictory. Rather, to protect the contribution in the long term, a rigorous review of the shortcomings is necessary. My concern in this discussion also stems from here. I have spent a long time in the microfinance sector. My work, which started from the grassroots field level, progressed through the branch level, management level, top management, and up to policy formulation and decision-making processes. In this process, I have felt the pulse of microfinance, touched its soil, and had the opportunity to understand its nature, essence, work, and objectives closely. I have directly experienced various levels from the borrower member's doorstep to the branch's daily pressure, employee targets to management strategies, and policy decisions to their implementation. Therefore, the question being raised today is not a superficial comment from the outside; it is an experiential question formed after working within the sector for a long time and observing it from directly outside for some time now. I have not left my job or profession; I have only moved out of the direct operational area of the microfinance sector and am moving forward in another profession and journey. Therefore, I have even more opportunity now to look at past experiences and current data comparatively. The question arising from that is simple, but its answer is serious—has microfinance truly improved, or has only the accounting of microfinance improved? Profitability Figures vs. Quality of Profit Profit is an important indicator for financial institutions. Shareholders need returns. Healthy profit is also necessary for the continuity of the institution, employee employment, and the stability of the financial system. Therefore, it is not appropriate to view the news of increased profits with suspicion alone. However, increased profit and improved fundamental health of the institution are not the same thing. A patient's fever reducing and the disease being completely cured are not the same. Similarly, there can be a big difference between increased profit in financial statements and the borrower's economic capacity strengthening. Therefore, the question should now be—how did the profit increase? What is the reason for the decrease in bad loans? Has actual recovery increased, or has there been a change in loan classification or structure? If the account has become regular, is it due to increased borrower income or due to restructuring, rescheduling, or other financial management? Is the borrower repaying the installment from their own business or from another loan or other sources to manage the old liability? These questions do not hold any institution guilty. However, without seeking their answers, calling financial improvement complete improvement is also not a responsible approach. Extension of Loan Term vs. Increase in Borrower Capacity Loan renewal or restructuring is not a bad practice in itself. Due to natural disasters, market fluctuations, economic recession, or temporary business problems, the borrower's repayment capacity may weaken. In such a situation, it is also the responsibility of the financial institution to give the borrower time to stand up again. However, if the borrower's income base is weak, the business cannot afford the installments, and new financial structures are repeatedly needed to manage the old liability, it cannot be considered the final proof of improvement. Postponing the problem and solving the problem are not the same thing. A loan account becoming regular and the borrower's economic life becoming regular are not the same thing. Risk appearing low in financial statements and actual risk ending are also not the same thing. For this reason, the time has come to look at the quality of profit more than the profit of microfinance today. This is Also the Regulator's Test In this situation, the responsibility of the regulatory body becomes even more serious. Regulation does not mean just obtaining financial statements, looking at indicators, and being satisfied when everything looks fine on paper. Regulation means identifying the source of risk and intervening before the problem becomes big. The questions the regulator should now ask are clear—what is the real source of profit? What is the real reason for the decrease in bad loans? Is the improvement in recovery from the borrower's own income or is it the effect of financial restructuring? What changes have occurred in the business and income of borrowers whose loans have become regular? How much has the situation of multiple loans decreased? Has loan renewal and rescheduling provided a real solution, or has it pushed the risk into the future? The answers to these questions may not come from office files alone. If necessary, it may be required to go to the borrower's doorstep, business, farm, shop, and actual transactions for testing. Sometimes, the real story of a borrower speaks more truth than thousands of pages of financial statements. Therefore, the regulator's perspective should go beyond whether the report is correct? to whether the reality is also correct? Directors and Shareholders Should Also Look in the Mirror The responsibility of microfinance institution directors is not just to increase profit, but also to keep the institution safe in the long term. Short-term profit may satisfy shareholders, but profit achieved by increasing future risk cannot be sustainable. Therefore, directors should not just ask management for profit figures, but should question the basis and quality of that profit. How healthy is the loan portfolio? What is the borrower's real repayment capacity? Where is the risk accumulating? How much has today's profit addressed tomorrow's potential risk? Shareholders should also look beyond dividends and share prices to see how sustainable the institution is. An investment culture that risks the long-term health of the institution for the sake of high returns is ultimately against the shareholders' interests. The Real Test of Management Lies in Accepting Uncomfortable Truths High management and the management level bear the responsibility of understanding the real situation of the institution and providing truthful information to the directors. Preparing a report that looks good and the institution actually being good are different matters. Targets can be met. Recovery can be increased. Profit can be shown. But if the price for that is tomorrow's risk, it cannot be called success. The real efficiency of management is not seen in hiding problems, but in identifying problems and finding solutions in time. Creating an environment within the institution where uncomfortable truths can be spoken is the ethical and institutional responsibility of management. Let's Not Make Employees Machines for Targets The real implementation of microfinance happens at the branch and field level. Employees act as a bridge between the institution's policies and the borrower's reality. Targets come from above, there is pressure for recovery at the branch, and on the other hand, the borrower is struggling with their economic capacity. Therefore, solving the problems of microfinance by blaming only the employees will not work. The institution must also protect employees from unrealistic targets, unnatural pressure, and wrong incentive systems. However, employees also have their responsibilities. Giving more loans than the borrower's capacity is not success. Recovering installments through undue pressure is not financial discipline. Hiding real problems and showing good figures on paper is not loyalty to the institution. Employees who provide responsible financial services are more valuable to the institution than employees who meet targets. Borrower's Rights Along with Responsibilities It is also wrong to draw conclusions by showing only the borrowers as victims and the institutions as solely guilty in the discussion of microfinance. If a loan has been taken, it must be repaid. Loans should be used in productive sectors. Income should be generated. Financial discipline must be maintained. One must get out of the cycle of taking another loan to repay one loan. It is not acceptable to give the entire blame to the institution for spending the borrowed amount in unproductive sectors. But another truth is equally important—institutional behavior of lending without looking at the borrower's capacity, expanding loans without looking at business potential, and later putting that same borrower under severe recovery pressure cannot be considered responsible financial service. If the borrower has a responsibility, the institution also has a responsibility. The borrower's family cannot remain separate from this. Even if the loan is in an individual's name, its impact falls on the family. Therefore, there should be financial discipline and shared responsibility within the family regarding where the loan was used, how much income was generated, how much are the expenses, what is the basis for repaying the installment, and why a new loan is needed. Let's Measure Microfinance Success in a New Way The main objective of microfinance is not to keep borrowers indebted forever. It is to make them economically capable through loans. If a family borrows for years, repays installments, and takes new loans after the old ones are paid off, but there is no fundamental improvement in their income, business, savings, and assets, then it cannot be called complete success in financial empowerment. Access to loans is financial inclusion; being able to get out of the debt cycle is financial empowerment. Now, microfinance success should not be measured only by how much loan has been disbursed. How many borrowers became self-reliant? How many families' incomes stabilized? How many members repaid loans from their own income? How many borrowers were able to expand their business with their own capital without taking further loans? These questions should be made indicators of success. The real profit of microfinance should be seen not only in the shareholders' accounts but in the borrowers' lives. The real test is not only on the balance sheet. It is in the borrower's home. It is in their shop. It is in their farm. It is in their business. It is in their income and savings. It is in the timely installment they pay. And ultimately, it is in one question—after taking the loan, did they become capable of standing on their own feet within a few years, or did they become compelled to seek loans again? If the borrower continuously takes loans and repays installments but cannot build a strong financial foundation, microfinance must ask itself—are we expanding financial access or a debt cycle? Now All Parties Must Become Responsible The improvement of microfinance is not the responsibility of any one party. Regulatory bodies must conduct strict, impartial, and fact-based monitoring. Directors must prioritize the long-term health of the institution over short-term profit. Shareholders must question risk and sustainability along with dividends. Top management must create an institutional environment where truth can be spoken, not hide the truth. Management must focus on borrower capacity and institutional risk when setting targets. Employees must prioritize professional ethics and financial discipline over targets. Borrowers must take responsibility for the proper use of loans and timely repayment. The borrower's family must also participate responsibly in loan utilization, income, expenses, and liabilities. And the microfinance sector must ask itself a tough question—are we increasing debt or prosperity? If we don't wake up now, when will we? Microfinance is not just a business sector. It is a financial structure connected to the economic future of millions of families. It involves the trust of savers, the assets of investors, the employment of staff, and a large part of the rural economy. Therefore, the improvement seen in financial statements should not be denied, but it should not be considered the ultimate truth either. If the profit comes from actual recovery, if the borrower's business has grown, income has increased, savings have increased, repayment capacity has strengthened, and the debt cycle has decreased—then the microfinance sector has truly improved. However, if the borrower's situation remains the same, the debt burden is the same, new loans are needed to manage old loans, and the cycle of loan renewal continues, then the चमक of financial statements alone cannot hide the real crisis. An institution may run for some time by showing profit on paper; it cannot be saved in the long run by hiding reality. Therefore, the success of microfinance must now be proven not by balance sheet figures, but by the borrowers' lives. Let us now seek the success of microfinance on a day when borrowers, before reaching the institution's door and saying,