In recent years, the idea of giving small loans to poor people became the darling of the development world, hailed as the long elusive formula to propel even the most destitute into better lives.
Actors like Natalie Portman and Michael Douglas lent their boldface names to the cause. Muhammad Yunus, the economist who pioneered the practice by lending small amounts to basket weavers in Bangladesh, won a Nobel Peace Prize for it in 2006. The idea even got its very own United Nations year in 2005.
But the phenomenon has grown so popular that some of its biggest proponents are now wringing their hands over the direction it has taken. Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 per cent or more from their impoverished customers.
“We created microcredit to fight the loan sharks; we didn't create microcredit to encourage new loan sharks,” Yunus recently said at a gathering of financial officials at the United Nations. “Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.''
The fracas over preserving the field's saintly aura centres on how much interest and profit are acceptable and what constitutes exploitation. The noisy interest rate dispute has even attracted congressional scrutiny, with the House Financial Services Committee holding hearings this year focused in part on whether some microcredit institutions are scamming the poor.
Rates vary widely across the globe, but the ones that draw the most concern tend to occur in countries like Nigeria and Mexico, where the demand for small loans cannot be met by existing lenders.
Unlike virtually every Web page trumpeting the accomplishments of microcredit institutions around the world, the page for Te Creemos, a Mexican lender, lacks even one testimonial from a thriving customer — no beaming woman earning her first income by growing a soap business out of her kitchen, for example. Te Creemos has some of the highest interest rates and fees in the world of microfinance, analysts say, a whopping 125 per cent average annual rate.
The average in Mexico itself is around 70 per cent, compared with a global average of about 37 per cent in interest and fees, analysts say. Mexican microfinance institutions charge such high rates simply because they can get away with it, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates microlenders.
Unwitting individuals, who can make donations of $20 or more through Web sites like Kiva or Microplace, may also end up participating in practices some consider exploitative. These Web sites admit that they cannot guarantee every interest rate they quote. Indeed, the real rate can prove to be markedly higher.
Debating microloans' effects
Underlying the issue is a fierce debate over whether microloans actually lift people out of poverty, as their promoters so often claim. The recent conclusion of some researchers is that not every poor person is an entrepreneur waiting to be discovered, but that the loans do help cushion some of the worst blows of poverty.
“The lesson is simply that it didn't save the world,” Dean S. Karlan, a professor of economics at Yale University, said about micro-lending. “It is not the single transformative tool that proponents have been selling it as, but there are positive benefits.”
Still, its earliest proponents do not want its reputation tarnished by new investors seeking profits on the backs of the poor, though they recognise that the days of just earning enough to cover costs are over.
“They call it ‘social investing,' but nobody has a definition for social investing, nobody is saying, for example, that you have to make less than 10 per cent profit,” said Chuck Waterfield, who runs mftransparency.org, a Web site that promotes transparency and is financed by some of the big microfinance investors.
Making pots of money from microfinance is certainly not illegal. CARE, the Atlanta-based humanitarian organisation, was the force behind a microfinance institution it started in Peru in 1997. The initial investment was around $3.5 million, including $450,000 of taxpayer money. But last fall, Banco de Credito, one of Peru's largest banks, bought the business for $96 million, of which CARE pocketed $74 million.
“Here was a sale that was good for Peru, that was good for our broad social mission and advertising the price of the sale wasn't the point of the announcement,” Helene Gayle, CARE's president, said in an interview. Gayle described the new owners as committed to the same social mission of alleviating poverty and said CARE expected to use the money to extend its own reach in other countries.
Outgrown its charitable roots
The microfinance industry, with more than $60 billion in assets, has unquestionably outgrown its charitable roots. Elisabeth Rhyne, who runs the Centre for Financial Inclusion, said in congressional testimony this year that banks and finance firms served 60 per cent of all clients. Nongovernmental organisations served 35 per cent of the clients, she said, while credit unions and rural banks had 5 per cent of the clients.
Private capital first began entering the microfinance arena about a decade ago, but it was not until Compartamos, a Mexican firm that began life as a tiny nonprofit organisation, generated $458 million through a public stock sale in 2007 that investors fully recognised the potential for a windfall, experts said.
Although the Compartamos founders pledged to plough the money back into development, analysts say the high interest rates and healthy profits of Compartamos, the largest microfinance institution in the Western Hemisphere with 1.2 million active borrowers, has pushed up interest rates all across Mexico.
According to the Microfinance Information Exchange, a Web site known as the Mix, where more than 1,000 microfinance companies worldwide report their own numbers, Compartamos charges an average of nearly 82 per cent in interest and fees.
The microfinance industry is pushing for greater transparency among its members, but says that most microlenders are honest, with experts putting the number of dubious institutions anywhere from less than 1 per cent to more than 10 per cent. Given that competition has a pattern of lowering interest rates worldwide, the industry prefers that approach to government intervention. Part of the problem, however, is that all kinds of institutions making loans plaster them with the “microfinance” label because of its do-good reputation.
Yunus said interest rates should be 10 to 15 per cent above the cost of raising the money, with anything beyond that a “red zone” of loan sharking. “We need to draw a line between genuine and abuse,” he said.
Yet by that measure, 75 per cent of microfinance institutions would fall into Yunus' “red zone,” according to Mix. — ©2010 New York Times News Service
( Elisabeth Malkin contributed from Mexico City .)
