In my review of Milford Bateman’s book, I noted his almost fanatical opposition to microfinance. With the recent high level of publicity surrounding Mohammad Yunus and the Grameen Bank, it’s a good time to reflect on this touchy issue.
My book review was written in October last year. In that time, I have seen headline after headline dealing with microfinance institutions (MFIs). I can’t think of one in hindsight that was positive. The biggest problem is this: MFIs are too often pushed to generate a profit.
Once the profit motive kicks in, how the organization operates invariably goes downhill. First, “market-based” interest rates are implemented. While institutions can get rates in the single digits, since these poor people are more of a risk, they often pay what most consider to be predatory interest rates. These rates are the first domino to fall in the Spiral of Poverty.
To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can’t be cut below certain minimums.”
What happens is that to meet the high interest rates, MFIs encourage the poor to take out loans to “top off.” These “top off” funds are used to pay off the interest in the loan. Of course, that leaves the poor person with another loan to pay off. It’s very good for the MFI, but not so good for the poor person in question.
Of course, if the poor person takes out a bigger loan, they can get a lower interest rate. Hurray! We can do to them what the housing bubble did in the USA. Remember all those people shouting that it was the poor people’s fault for taking out a loan they knew they couldn’t pay back? Be ready for that x two billion.
What about those non-profit MFIs? Well, Kiva is a big name. Let’s look at what they do: They take your money, loan it to a local MFI who then loans it to someone else. They charge that person interest. If that person pays back the loan, they give you your money back without interest. Riiiight.
Let’s back up for a second and reframe this. I loan you $100. You loan it to a guy named Fred and charge interest of say 30%. Fred repays you. You pocket $30 and repay my $100.
It’s basically naked short selling!
I’m not sure if people donating to Kiva realize they are actually enriching what is most likely a for-profit bank.
Ok, even if it works like something cooked up in the hellish bowels of Goldman Sachs, it still helps people, right?
Well, maybe. In Bangladesh, there was a program that helped women buy cellphones that they then charged people to use locally. It was great until every woman in the village was partaking and the market for the service collapsed. The thing is, the banks don’t care. They just want money.
MFIs are just as greedy as the rest of the banks. In a capitalist society, there isn’t really anything wrong with that. Until everyone realizes they are making their money off the poor, that is. At that point, morals and ethics are supposed to kick in. Too bad most of the time that never happens.