Here at EconomyWatch, we consider micro-credit to be a key issue in one of our main concerns:
the impact of
world political economy on ordinary people's lives.
We have looked at the situation from the perspective of those promoting micro-credit for profit,
the specific problems for-profit micro-finance has caused in India,
as well as the growing resentment towards the "industry" world-wide.
In this piece, Bangladeshi Muhammad Yunus, the "founder" of micro-credit, via his Grameen Bank, talks about the problems of micro-credit today, and the most effective means to solve them --
first and foremost, effective / intelligent / EMPATHETIC government regulation.
While he himself has been having problems of late with the Prime Minister of Bangla Desh, Sheikh Hasina,his
commitment to the success of micro-credit FOR PEOPLE is undeniable,making his thoughts on this key and increasingly
important issue area as relevant as ever.
David Caploe PhD
Editor-in-Chief
EconomyWatch.com
President
/ acalaha.com
In the 1970s, when I began working here on what would eventually be called “microcredit,”
one
of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor.
In 1983, I founded Grameen Bank to provide small
loans that people, especially poor women, could use to bring themselves out of poverty.
At that time,
I never imagined one day microcredit would give rise to its own breed of loan sharks.
But it has.
And as a result, many borrowers in India have been defaulting
on their microloans,
which could then result in lenders being driven out of business.
India’s crisis points
to a clear need to get microcredit back on track.
Troubles with microcredit began around 2005, when
many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations
to commercial enterprises.
In 2007, Compartamos, a Mexican bank, became Latin America’s
first microcredit bank to go public.
And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering.
To ensure that the small
loans would be profitable for their shareholders,
such banks needed to raise interest rates and engage in aggressive marketing
and loan collection.
The kind of empathy that had once been shown toward borrowers when the lenders were
nonprofits disappeared.
The people whom microcredit was supposed to help were being harmed.
In India, borrowers came to believe lenders were taking advantage of them, and stopped repaying their loans.
Commercialization has been a terrible wrong turn for microfinance,
and it indicates a
worrying “mission drift” in the motivation of those lending to the poor.
Poverty
should be eradicated, not seen as a money-making opportunity.
There are also serious practical
problems treating microcredit as an ordinary profit-maximizing business.
Instead
of creating wholesale funds dedicated to lending money to microfinance institutions, as Bangladesh has done,
these
commercial organizations raise larger sums in volatile international financial markets, and then
transmit financial
risks to the poor.
Furthermore, it means commercial microcredit institutions are subject to demands
for ever-increasing profits, which can only come in the form of higher interest rates charged to the poor,
defeating the very purpose of the loans.
Some advocates of commercialization say it’s
the only way to attract the money that’s needed to expand the availability of microcredit and to “liberate”
the system from dependence on foundations and other charitable donors.
But it is possible to harness investment
in microcredit — and even make a profit —
without working through either charities
or global financial markets.
Grameen Bank, where I am managing director, has 2,500 branches in Bangladesh.
It lends out more than $100 million a month, from loans of less than $10 for beggars in our “Struggling
Members” program,to micro-enterprise loans of about $1,000.
Most branches are financially self-reliant,
dependent only on deposits from ordinary Bangladeshis.
When borrowers join the bank, they open a savings
account.
All borrowers have savings accounts at the bank, many with balances larger than their loans.
And
every year, the bank’s profits are returned to the borrowers — 97 percent of them poor women — in the form
of dividends.
More microcredit institutions should adopt this model.
The
community needs to reaffirm the original definition of microcredit,
abandon commercialization,
and turn back to serving the poor.
Stricter government regulation could help.
The
maximum interest rate should not exceed the cost of the fund —
meaning the cost that is incurred
by the bank to procure the money to lend —
plus 15 percent of the fund.
That
15 percent goes to cover operational costs and contribute to profit.
In the case of Grameen Bank, the cost of fund is
10 percent.
So, the maximum interest rate could be 25 percent.
However, we charge 20 percent to the borrowers.
The
ideal “spread” between the cost of the fund and the lending rate should be close to 10 percent.
To
enforce such a cap, every country where microloans are made needs a microcredit regulatory authority.
Bangladesh,
which has the most microcredit borrowers per square mile in the world, has had such an authority for several
years,
and it is devoted to ensuring transparency in lending and prevented excessive interest rates
and collection practices.
In the future, it may be able to accredit microfinance banks.
India,
with its burgeoning microcredit sector, is most in need of a similar agency.
There are always people eager
to take advantage of the vulnerable.
But credit programs that seek to profit from the suffering of the poor
should not be described as “microcredit,” and investors who own such programs should
not be allowed to benefit from the trust and respect that microcredit banks have rightly earned.
Governments are responsible for preventing such abuse. In 1997,
then First Lady Hillary Clinton and Prime Minister Sheikh Hasina of Bangladesh met with other world leaders to commit
to providing 100 million poor people with microloans and other financial
services by 2005.
At the time, it looked like an utterly impossible task, but by 2006 we had achieved
it. World leaders should come together again to provide the powerful and visionary leadership to help steer
microcredit back on course.
A sentiment with which we could not agree more.
chris macrae www.microcredit.tv
