Micro-Lending Better in Theory Than Reality

Wednesday, April 14, 2010

Micro-lending was supposed to save the world's poor from big, overseas lenders; but, an article in this morning's New York Times reveals that although the theories behind micro-finance seem to work, the actual loans don't.

Neil MacFarquhar is The New York Times' United Nations Bureau Chief and he says that while these small loans were designed to pass money to the world's poor, unusually high interest rates make these loans less effective than they're worth. We also hear from Alex Counts, the president and CEO of Grameen Foundation, a non-profit organization focused on micro-financing. Together the two paint a more complicated picture of what was thought to be a good solution to helping the world's poorest communities.  

Guests:

Alex Counts and Alex MacFarquhar

Produced by:

Hsi-Chang Lin

Comments [3]

adsprung from New Jersey

3 errors at the outset here:
1) MF is not focused so much on helping people "become" entrepreneurs as it is on helping microentrepreneurs -- that is, the vast mass of the world's self-employed poor -- establish their businesses on a more sound footing.
2) MF is not primarily concerned with "protecting" its customers from large banks. Large banks have historically ignored the poor in most of the world. MF primarily provides alternatives to the informal sector - often a local private lender whose annualized interest rate may be 200% or more (and even that is not always exploitative -- $10 loaned for a week for a 25 cent fee is a 261% annual interest rate (source: Portfolios of the Poor).
3) Grameen did not "create" the modern microfinance industry or offer the first modern microfinance loan. Microlending in Latin America predates Grameen.

Additionally, Mr. MacFarquhar seems to have misunderstood the stat he cited from Elisabeth Rhyne's testimony - that "Banks and finance companies make up 39 percent of the institutions and serve 60 percent of all borrowing clients." "Banks and finance companies" here refers primarily to microfinance organizations that have converted themselves into regulated financial institutions, not conventional (large) banks that have jumped into microfinance. Mr. Counts did briefly indicate that something was amiss with this stat as retailed here.

Also, neither the Times article nor this Takeaway segment made it clear that individual country conditions are the prime determinants of MF interest rates. Rates in Mexico do average 2-3 times rates prevalent in South Asia. That's mainly because labor costs are many times higher, the population is more dispersed, and the average loan size as a percentage of gdp is much smaller in Mexico than in India or Bangladesh. Credit card interest rates in Mexico average about 60%.

While rates in Mexico can and should (and will) come down, their current levels do not mean that MF is not helping poor Mexicans. Compartamos has one of the highest repayment rates and highest repeat-business rates in the industry.

Apr. 15 2010 11:29 AM
Nicholas Antaki from New York

I agree 100% with Alex. The NY Times article, although certainly noble in intention, is way over-symplified and not fully researched.

Apr. 15 2010 02:36 AM
Frank

Listening to your discussion on micro financing and the outrage with some folks in poor countries being charge 100% interest. You should look closer to home. TODAY IN the United State companies making "Pay Day Loans" charge up to 400% interest.

Where is the outrage of US citizens????

Apr. 14 2010 08:45 AM

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