Problems in the micro-loan world

Our friends over at SepiaMutiny have run a rather fascinating post about the nature of micro-loans and the banks that offer  them.

In case you aren’t entirely familiar, the concept of micro-lending was developed by Mohammed Yunus, a professor in Bangladesh who founded the Grameen Bank.  This bank specialized in offering very small loans ($100) to women in Bangladesh and ended up having a phenomenal rate of success.

He built on this principle and it quickly caught on and expanded all over the world.  Now, we’ve got websites like that let regular people offer microloans to approved borrowers.

But not all is well on the micro-loan front.  At least not according to this article.  One of the micro-lending banks, CompartamosBanco in Mexico has gone public in an IPO last year.  The accusation is then that it is now acting like a company and not in the best interests of the poor.

“Another critic, Chuck Waterfield of Microfin, a provider of software to microfinance institutions, accuses Compartamos of “monopolistic exploitation of the poor”. He alleges that it is charging interest rates of over 100% a year, little different from what illegal loan sharks demand, and that it is deliberately making it difficult for poor borrowers to understand how much they are paying for their loans. He and Mr Yunus are campaigning for the microfinance industry to agree on common standards on disclosing charges to help borrowers.”

There is now much more competition between the needs of the shareholders (i.e. they need a return on their investment) and the needs of the poor.  Instead of acting somewhat selflessly, there is now concern that the profit motive will take over.

It’s definitely a concern, and one that the rest of the micro-loan world seems keen to avoid.  I think I’d back Yunus as far as saying there should be a standard code of conduct for these institutions, especially with regards to disclosing their interest rates and providing information to potential clients.  If they begin to act like traditional banks, it does seem to pervert the basic idea of what they set out to do.

[Sources: SepiaMutiny, the Economist]

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