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.”
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.