Nina
Raman
For most people outside of the business
world, the name Muhammed Yunus doesn’t ring a bell. Yet this banker has managed
to generate a profound social change through his unique system of microloans
for the poor. Microloan borrowers use relatively small loans, usually ranging
from $75 to $150, to finance new businesses. This helps to generate a steady
stream of income for individuals otherwise destined for poverty. While many investors
were highly skeptical of Microfinance at first, these days it is generally
accepted that microfinance is an effective way of alleviating poverty. Indeed,
the Grameen model is followed in over 100 countries, in places as diverse as
Kenya, Sri Lanka, and Ethiopia. By founding the Grameen Bank in his home
country of Bangladesh, Yunus pioneered the idea of microfinance and brought
tangible improvements to impoverished rural communities; allowing him to win
the Nobel Peace Prize in 2006. Aside from providing rural areas with
much-needed capital, microfinance encourages borrowers to improve sanitation,
reduce birth rates, and to increase women’s rights in their villages. But over
the past few years, the business model of microfinance has taken fundamental shift
towards free market capitalism, reigniting the classic debate of profit versus
social progress.
Grameen Bank issues loans of
approximately $75 at a fixed 20% rate of interest, a rate many would argue as
exploitative. Yet with the explosive growth of microfinance, interest rates
have gone even higher in certain countries as an increasing number seek to make
Yunus’s model much more profitable by raising interest rates to shockingly high
levels, often between 40 to 70%. This leads to an ethical dilemma about the
nature of microfinance: is it predatory to charge these “usurious” interest
rates to rural borrowers with limited financial education?
Compartamos Banco, a successful Mexican
microloan lender, issues loans at interest rates at around 80%. It argues that
while this may at first seem high, one has to consider the costs associated
with operating a MFI. It has to employ people to collect payments door-to-door
as well deal with the fact that that a good number of bowers will default on
their loans, makes the cost of doing business extremely expensive. Also, since
microloans are often short-term, usually lasting 6-12 months, the annual
interest rates are usually not paid in full.
Compartamos
dismisses claims that its loans are predatory, and in fact argues that its
increased profit margins help it to give out more loans, thereby helping more
people. The bank does not give loans to the poorest of the poor because it
wants to avoid defaults, but does offers financial literacy classes to
borrowers, which helps them to make educated decisions regarding their loans.
It
is also important to consider that in many countries, the interest rates
charged by profitable MFIs pale in comparison to those charged by local banks,
many of which establish rates in excess of 100%. Not to mention that these
local banks often employ brutal tactics to collect payments; if a family
doesn’t pay, it is sure to face violence or long-term indentured servitude to
the moneylender. In fact, many families in Bangladesh are mired in debts to
such moneylenders, and as a result cannot enjoy any of the profits from their
small farms or other enterprises.
Ultimately it is very difficult to
discern whether such high interest rates are justified or ethical, and there
are legitimate arguments on both sides of the issue. What is important is that
all MFIs, regardless of profitability, are campaigning for positive social
change. So while MFIs like Compartamos turn towards capitalism was perhaps
inevitable, their efforts have done more to reduce poverty in rural communities
than ever thought possible. For this reason these organizations deserve to be
applauded.
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