Is microfinance going the same way as subprime mortgages?
THE notion, popularised by C.K. Prahalad’s best-seller, “The Fortune at the Bottom of the Pyramid”, that poor people should be seen as potentially profitable customers rather than mere charity cases, has caught on fast in the past few years. Finding profitable ways to meet the needs of poor people, the idea goes, would not only empower them by making them customers rather than supplicants, it would also attract far more capital than would ever be forthcoming from charity. For the providers of this capital, catering to the bottom of the pyramid promised to be good for the soul as well as the wallet.
A growing number of investors have taken the chance, investing in bottom-of-the-pyramid businesses, of which by far the most popular to date is microfinance—providing loans and other financial services to people ignored as too poor by the traditional banking system. Yet as this idea has spread, it has become increasingly controversial.
The first line of attack, taken up by such luminaries as Muhammad Yunus, the Nobel Peace prize-winning founder of the non-profit microfinance institution, Grameen Bank, is to accuse for-profit providers of charging their poor customers too much. Compartamos Banco, a Mexican microfinance firm that had a successful initial public offering (IPO) in 2007, has been denounced by Mr Yunus and others for charging interest rates of close to 100% a year.
Now a second line of attack has been launched, in which for-profit microfinance firms are accused of lending recklessly to people too poor to repay the loans. An article in the Wall Street Journal on August 13th, “A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum”, reported on a “repayment revolt” by over-indebted borrowers in the Indian shanty town of Ramanagaram, in the state of Karnataka, which had been “carpet-bombed” with loans from microfinance firms. This, the article continued, was evidence of a “credit crisis brewing” in microfinance. Moreover, it continued, ominously, “many of the problems in Indian microlending might sound familiar to students of the US mortgage crisis.”
Are microfinance loans the new subprime mortgages? The Journal article certainly contains plenty of echoes of the American mortgage-lending binge in the middle of this decade, including loans made without any proof of income from borrowers by loan officers on commission. And, in contrast to the classic image of microfinance as a source of credit for “microentrepreneurs” to expand their small businesses and thus grow their way out of poverty, it also described loans being used to finance shopping sprees, or to pay off loans from other lenders, including loan sharks.
Moreover, claims of a bubble are particularly worrying in India at the moment, as it has recently overtaken Latin America as the world’s most dynamic microfinance market, especially for for-profit microfinance. Some 22m Indians are now served by microfinance institutions, and outstanding credit has been growing at over 50% a year.
Related articles by Zemanta
- Vivian Norris de Montaigu: Microfinance as a Solution: Beggars, Thieves, AIDS and Prostitution (huffingtonpost.com)
- Microlending in the U.S.: A Solution to the Economic Crisis? (takepart.com)
- Why There’s No Credit Crisis in Microfinance (blogs.harvardbusiness.org)
- Microloans with The Green Children (takepart.com)
- Paying to Save: A Financial Innovation from the Worlds Poor (ericjohnolson.com)