Microfinance — All It’s Cracked Up to Be?

mfinancenigeria

Activists, aid workers, development experts and everyday folks have raved over microfinance in the past couple of years, specifically its ability to help impoverished entrepreneurs and small businesses like hair salons and grocery shops thrive in Africa, Latin America and other developing parts of the world.

But the beloved world of micro-lending has its ugly side. As The New York Times reported recently, large banks and financial institutions now dominate the lending field, charging up to 100% for very small loans (often under $1,000). These lenders are the new loan sharks, turning a trend of empowering disadvantaged businesspeople into a way to get rich quick.

Countries like Mexico and Nigeria, where demand for micro-loans surpasses the number of lenders, are hit the hardest. The average interest rate in Mexico is about 70% and in Nigeria, for those who borrow from the nation’s largest lender, 74%, compared to a 37% world average.

As the Times story quotes Chuck Waterfield, a proponent of microfinance accountability: “You can make money from the poorest people in the world — is that a bad thing, or is that just a business?” asked Mr. Waterfield of mftransparency.org. “At what point do we say we have gone too far?”

mfinancemexico

Photos of struggling entrepreneurs in Nigeria and Mexico via The New York Times

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Comments 4

  1. blackwatertown April 22, 2010

    Oh interesting article in the New York Times. I am just about to get into lending some money through microfinance, possibly through the ZOPA website. We’re not talking very much money here.

    But it’s hard to know what is the best approach. Which site connects best with those who need it? Will you ever make any money at all? Or – according to the NYT – is it the route to a jacuzzi full of cash – something that definitely had not occurred to me before.

    I want to make funds available to people who need it and will use it effectively, but also not lose it all immediately through default. If that happens it’ll be a brief experiment.

    Anyway – more research by me needed. Thanks for the interesting pointer and good photos as always.

  2. Fehmeen May 3, 2010

    Making money from the poor has been acceptable in the traditional economy for some time, e.g. Unilever sells small shampoo sachets to the poor for Rs. 1 each. Now that seemed like an incredible business strategy to all of us and we’ve been looking for ways to tap the bottom of the pyramid for some time now. How do we know we’ve gone too far, you ask. I think that is pretty subjective. Prof. Yunus suggested a simple formular to help us decide, but it was too incomprehensive to be practical. There are, of course, other ways of ensuring MFIs control their interest rates…

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