Big Banks Transforming "Micro-Finance" Sector in Third World

By: EW News Desk Team   Date: 19 April 2010

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EW News Desk Team

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EconomyWatch, News Desk Team

 

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19 April 2010

Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the micro-finance field, with some charging interest rates of 100 percent or more.

“We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,” Muhammad Yunus,

Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the micro-finance field, with some charging interest rates of 100 percent or more.

“We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,” Muhammad Yunus,

the economist who pioneered the practice by lending small amounts to basket weavers in Bangladesh, and won a Nobel Peace Prize for it in 2006, said at a recent 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 centers on the question of how much interest and profit is acceptable, and what constitutes exploitation, according to this feature article by the always interesting Neil MacFarquhar in the New York Times.

The noisy interest rate fight 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 from a large population cannot be met by existing lenders ...

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 ...

Still, its earliest proponents do not want its reputation tarnished by new investors seeking profits on the backs of the poor, though they recognize that the days of just earning enough to cover costs are over ...

The microfinance industry, with over $60 billion in assets, has unquestionably outgrown its charitable roots.

Elisabeth Rhyne, who runs the Center for Financial Inclusion, said in Congressional testimony this year that banks and finance firms served 60 percent of all clients. Nongovernmental organizations served 35 percent of the clients, she said, while credit unions and rural banks had 5 percent 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 organization, generated $458 million through a public stock sale in 2007, that investors fully recognized the potential for a windfall, experts said.


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