Microfinance raises fresh sub-prime fears

Microfinance raises fresh sub-prime fears
    Times Online, July 14, 2008

“Microfinance is supposed to offer a “’double bottom line’”: the financiers make profits while helping some of the world’s poorest people.” But as the market for Microfinance grows and more lenders appear, concern in growing that a scandal similar to the US could be created. There is fear that micro-borrowers could find themselves in similar situations to those American’s who were sold loans they couldn’t pay. But since Grameen’s birth (over 32 years ago) there has been an impressive repayment rate of 97%, which is far higher than repayment rates seen in traditional banking.
There is no need to equate microfinance with the sub-prime borrowers of the US. Also, in the grand scheme of things, microloans are far smaller than any sub-prime housing loan in the United States. Loans under $10 are of help to someone in a third world country who is looking to purchase the most basic capital to begin their own home-run business.
Sequioa (the venture capital firm that backed Google) recently took stake in SKS, India’s largest microfinancier.
There are estimates saying that $250 billion of microloans are demanded, which is going to encourage mainstream banks to get involved or open sectors that focus specifically on Micro-loans.
Microfinace is not a perfect system and, as with most fiscal operations, there is room for corruption. “Compartamos Banco, Mexico’s largest microlender with more than 840,000 customers, went public last year, raised $450 million for a group of backers that had originally invested just $6 million.” The bank did this by charging over 100% interest rates and although MF loan interest rates may be high, they are not nearly at this level. The returns this bank made were more than 3 times the 15% that Mexico’s traditional lenders received. The point of MF is to loan to those who would not be accepted at traditional banks and integrate them into society in this aspect, not to exploit these people who are not well-off to begin with.
In South Africa, loans are being misused to buy TVs and other electronics.
We cannot let these stories of corruption be the face of all MF banks. The grameen bank in particular has made great strides in the field and in alleviating poverty where it has gone and it is their model and reputation that should be imitated.
“Rapid growth… is now leading to accusations of aggressive collection or excessive profits” –Larry Reed of the Boulder Institute and in response, “we want to make sure [microfinance] doesn’t become a subprime case” Mr. Mahmood said.
Now microfinanciers are agreeing to a “do no harm” pact, which is in line with Grameens original rules of the institution.
For now, the postive aspects of microfinance must be promoted and the distinction between micro-loans and sub-prime loans made. Too many strides have been made in the field to allow the sub-prime crisis to ruin it.
 

*this article was written almost 1 year ago, so concerns now are likely higher than last summer.