Microlending: Crash at the Corner of Ideal and Real
Sunday, October 31, 2010 at 10:34PM by Bob Craft
Starting to be able to think again after an illness, I took a trip around the internet to educate myself about "microfinance," those small loans to the poor that seem like such a great idea. The concept keeps coming up as we in the Green Group think how to help local folks finance, for example, aquaponics "fish farms" to feed and support their families.
I started with Jessica Jackley's Ted Talk on "Poverty, Money—and Love." Watch this. You will be moved and inspired by this smart young woman. Then, as I did, you might click to Jessica's Kiva.org—it links microlenders and borrowers in such a compelling way that you may find it hard not to send $25 or more to the deserving folks pictured there. All in all, it seems like a very good thing.
I always have to peek behind the curtain though, and there are a couple of things in the dusty corners of Kiva that you might want to take a look at. First of all, it's easy to assume that your loan will go to the pictured person on Kiva when the total gets up to the desired amount. Oh wait, not really, since nearly all the people and projects have been vetted and fully funded before appearing online. If you think about it that's the only practical way to manage such a thing so it's OK I guess—if not quite in keeping with Jessica's dewey-eyed idealism.
Second, though Kiva charges no interest to borrowers (nor pays interest to lenders), their "Field Partners," microfinance institutions in the various countries, do charge interest, and the rates, Kiva admits, "They're High." The two Mexican microlenders in Wikipedia's "Kiva" entry (retrieved 10/21/10) are Admic Nacional(currently closed), 69% interest, and Fundación para la Vivienda Progresiva (FVP), a partner of CHF International (active), 24% interest. Kiva explains the hard, cold reality of it as pretty much the cost of doing business in a capitalist economy. Eyes dry now?
Even so, I was encouraged that there might be a way to secure microloans in Mexico. More searching finally led me to the village of Ocotlan, an easy drive from Chapala, where there's a branch of Banco Compartamos.Institición de Banca Múltiple. Wow! Maybe this is it it, I thought—dignified access to funds for people who really need it! I could feel the warm glow of faith restored.
But not for long. Compartamos is for real, all right. It has real money too, $577.5 million US dollars of it on loan now. And it makes small loans to real people, 1.5 million of them at an average of US $384.20. In fact Compartamos is "the largest microfinance bank in Latin America." And though it apparently offers loans at four per cent a month, it calculates its remuneration in such a way that the interest for a year is actually, according to microfinance specialist Chuck Waterfield, 129 percent! In addition, in 2007, the supposedly non-profit bank took thirty per cent of its equity public in an IPO, realizing many millions in profits for its principal investors. ("Compartamos," one should note, is Spanish for "let's share.")
A New York Times (4/5/08) article details the controversy over Compartamos profits in both Mexico and the US. Nobel Prize-winning microfinance founder Muhammed Yunus has blasted such high-interest lenders to the poor as "loan sharks." On the other hand, Mary Anastasia O'Grady in a Wall Street Journal opinion piece defends Compartamos, saying, "Helping the poor may be virtuous, but when the poverty industry starts losing 'clients' because the market is performing good works, watch out."
According to a 10/28/10 Wall Street Journal article, matters have reached the crisis stage in India, birthplace of Yunus's Grameen Bank, a philanthropic microlending institution. In India's southern state of Andhra Pradesh, commercial microloans have been blamed for up to 70 suicides by borrowers unable to pay. The government has begun to impose restrictions on the industry, and some local politicians have urged borrowers not to make their payments—thousands have complied. But the question has been sharpened: Should microloans be philanthropic and moderate in cost? Or market-cost vehicles for investor profits?
People above my pay grade will sort out these high-level issues. (For example, Chuck Waterfield is leading an effort to assure transparency in microfinance, so poor borrowers will at least know a microloan's true costs.) Down here at the lower level, our Lake Chapala Green Group challenge is to make sustainable options affordable for local people of lesser means. It does not appear that Compartamos will be of any help on that. So here we are, unrepentant idealists, still in search of practical means to make dreams real.
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Googled out, and sadder but wiser, I still haven't given up on local microroloans—there are a few more leads to follow—and our hope is that you, our readers, might respond with more ideas or contacts. Use "Post a Comment" below this article to chime in with an opinion or suggestion. Or Contact the Editor with hot leads or anything else.
Reader Comments (1)
Whenever I lend through Kiva, which I frequently do, I also add a fee to my loan to help Kiva pay for their expenses. My couldn't we add the option of paying a reasonable amount (ie 10-15%) of our loaned amount towards the lending institution's fees? It would be an incentive for the lender to keep their loan rates down because they would get paid up front, whether or not the loanee can pay back their loan. This would also help them keep their lending rates low for the reason I just mentioned, even if someone defaulted on the loan, the bank gets the money. Let's also keep in mind that these loans primarily serve women in 3rd world countries where previously, there was no such thing as a bank to lend them money. People are able to help themselves rise out of poverty, a very powerful thing. It only works as long as the lending institute is also making money, however, I would encourage Kiva to ONLY work with banks that have reasonable lending fees. To me reasonable means no higher than 20%.