Microlenders and the Microloansharks Who Love Them

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Why should we be surprised that all-but-loansharking-loansharks have apparently moved into the formerly charitable sacred cow of microlending? Commercial banks and finance firms are only 39 percent of the microfinance institutions in the world (NGOs are 36 percent and credit unions and rural banks are 25 percent), but their microlending serves 60 percent of the clients.

Why would they be glomming onto the idea that Grameen’s Nobel Peace Prize laureate, Mohammad Yunus pioneered? Banks have figured out how to get “hefty profits from even the smallest of loans,” according to an April 13th New York Times article, charging interest rates of 100 percent or more. According to the nonplussed Yunus, “We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks. Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.”


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Mexican microlender Te Creemos (“We Believe You”) charges an average annual interest rate of 125 percent on its micro loans; Mexico’s nationwide average is 70 percent compared with the global average of 37 percent in interest and fees. How do they get away with that? Because they can. There’s no real regulatory oversight over international support for microlending. The borrowers—poor people in developing countries—sometimes don’t really know what they’re paying. For example, Compartamos in Mexico charges a rate of 82 percent, but one borrower for a T-shirt factory was “hazy” about what she was paying on her loans.

How does the nonprofit sector enter into this? One way is that “donors” can make loans to microlenders through highly lauded nonprofit Web sites such as Kiva, where Kiva lenders can make zero percent interest rate loans through Kiva’s online platform (among others, one of Kiva’s creators was an executive with PayPal).

Kiva promises that their loans will not go through microlenders that charge excessive interest rates, but the Times found Kiva working through Life Above Poverty Organization (LAPO), backed by DeutscheBank and the Calvert Foundation, making loans at 83 percent interest, though Kiva’s site said that the LAPO rate was only 57 percent (Kiva changed the online information after a call from the Times reporters).

Kiva’s lenders may be just as surprised as borrowers from Kiva-capitalized microlenders. Witness this comment posted on the New York Times blog: “I loan through Kiva and I didn’t know that these other organizations were charging interest. I don’t like that at all. I think of my loans as donations that I keep recycling to different people and I don’t see why I should be loaning money to people who are then charging high interest rates, especially since I voluntarily give a 10% chunk to Kiva each time.”

Kiva, by the way, is not the only nonprofit portal connected to microloansharks. Grameen’s Yunus is beside himself trying to draw a line between the microlenders and the microloansharks.

So what’s really happening? Partly, this is an industry that was oversold as the cure for poverty, and it’s clearly not. As Dean S. Karlan, a professor of economics at Yale University noted, “It is not the single transformative tool that proponents have been selling it as, but there are positive benefits.” But partly because it has been oversold as something close to a panacea, it has not had the kind of critical oversight that it should have, allowing loan sharks to swim in. Because U.S. foreign aid often goes to help microlenders, expect Congressional hearings very soon.

  • Tan Tien

    This is a highly oversimplified and sensationalistic article. Do you realize that LAPO is a Grameen Foundation funded microfinance institution?

  • rick cohen

    A little addendum: We want readers to understand that microlending interest rates are always higher, generally much higher, than the interest rates charged on commercial loans, even the high credit card rates we all face. Remember that in the cases of microlending in developing countries, typical and acceptable interest rates are sometimes in the 20-40 percent rates and even higher, and despite those apparently high numbers that we won

  • rick cohen

    Thank you Tan Tien for the comment. I anticipated the issue of oversimplification, which is why I added the comment above–citing Yunus’s own analysis–to add more than the New York Times did.

  • didit

    I believe the answer lies in a drastic change in the micro-finance landscape. Too much of the focus has been on the credit portion of finance, whereas the equity financing option has received little to no traction to speak of.

    New players in this field, including the InVenture Fund (InVentureFund.org), are trying to reduce the oppression of high interest rates by investing in these businesses instead of providing loans. InVenture’s model is centered around enabling long-term growth using a profit-sharing system with a business skills training component, thereby allowing micro-businesses to take reasonable business risks and flourish in their developing communities.

    I think it is time that we started saying enough is enough, and asked firms like Kiva for more accountability. Partnering with institutions that charge high interest rates only exacerbates the problem. Desperate people in struggling communities need better options!

  • StreetCred

    The comments posted here are valid, and it is refreshing to see the somewhat ironic link of an MFI charging 126% to the poor to Grameen. However, the standard defence of high operating costs is used as a catch-all argument to justify any behaviour. I accept that microloans are more expensive to operate, but 126%? From an institution that posted a net return on equity of 50.7% in 2009 and is one of the most profitble MFIs in Africa? Is this reasonable?

    The Kiva response suggested inflation and population density add to the cost of a loan – Nigeria enjoys low inflation and extremely high population density.

    Other investors in LAPO are also worth mentioning: Citibank, Standard Chartered, ASN Bank (an “ethical” bank in Holland), Oxfam, and two large microfinance funds – Blue Orchard and Incofin. These investors recently formed a Taskforce to try to correct some “anomalies” at LAPO and reduce the interest rate, resulting in an independent external rating. The result? A 3-point downgrade from B+ to C+ (original rating by MicroRate, recent rating by Planet Rating), a repeat of all the usual criticisms of LAPO that have been known about for years, and confirmation of an INCREASE in the interest rate. Many of these investors willingly endorsed Chuck Waterfield’s Microfinance Transparency movement reagrding interest rates, and yet Kiva was caught not being entirely transparent regarding the actual rates charged by LAPO (outdated information apparently); MicroPlace and Calvert removed LAPO from their websites immediately after MicroPlace stated that rates could reach up to 60%; and ASN Bank published an article last July stating that rates could be as high as 30%. I hardly think this can be considered transparent when it was widely known for years that LAPO was charging over 100%.

    The rating report mentions a host of additional problems (the “external” auditor is a brother of a board member, the IT system is deeply flawed, the portfolio data is untrustworthy etc etc).

    It is fair that MFIs should make a profit – they assume risk and need to grow. But when do we say “enough is enough”? At 100%? At 200%? Do we really believe that self-regulation in this sector is working? And perhaps most importantly, do we trust the intermediaries (Kiva, Calvert, ASN Bank etc) to act on the best interests of both the investing public (who want to see genuine development) and the poor? I am increasingly suspecting not.

  • Jan Doggen

    @Rick and @StreetCred

    Pointing out rotten apples (real and suspected) is fine, and they *should* be re-investigated, but did you report to or request from Kiva, ASN etc directly?
    That can make a difference for the better. I hope writing an article is not the only thing you do with that knowledge. Keeping MFI institutions as ‘clean’ as possible should be the first goal IMO.