Readers of this blog will have noticed that I have veiled respect for Larry Reed. He’s the head of the MicroCredit Summit Campaign, a spin organisation that one would expect to dwarf even Grameen Foundation USA in terms of mindless promotion of the ailing sector. In fact he doesn’t. He is frank, bold, open, prepared to admit failures in the sector, and search for solutions. Plus he wrote a nice review of my book! So, when he published the recent “State of the MicroCredit Summit Campaign 2013” I actually read it. Here’s a brief review.
First, in terms of conflicts of interest, the only obvious one is the link to Citibank, who sponsor the Summit Campaign. This even earned Robert Annibale the privilege of being referred to as a microfinance expert on the website (he talks about telephones). We all have paymasters. So, there may have been some minor censorship, but I doubt Larry would kowtow even to Annibale too much. Grameen and Kashf are on the council of practitioners, but I doubt they had much influence either, although Alex Counts got a few mentions and a text box that the reader can safely skip without interrupting the flow of the document.
The report begins with the usual banter of a success story. Oh no, I thought, not another string of goat stories! Not at all: even on the first page Reed openly states “Not all microfinance clients achieve the same level of success as Conchita”. Wow, such an admission on page one. Judging from most industry websites every single microfinance client will shortly be retiring to a Caribbean island with the benefits accrued from the $100 loan. So far so good, I made a fresh cup of tea.
The bottom line of the report: microfinance clients are in decline. The total fell from 205 million to 195 million (5%), and those in the poorest category fell from 138 million to 125 (nearly 10%). This is actually quick shocking. It’s the first time this has ever happened, and bear in mind this is 2011 data. 2012 wasn’t the best year for the sector either. The decline is largely accounted for by Bangladesh and India, but slowed in most regions, the notable exception being sub-Saharan Africa.
It looks like Yunus might be stalling his “poverty-museum” a while.
I assume these 10 million former clients who no longer have loans are now so ludicrously wealthy that they don’t need credit? Or are they suffering in the slums in despair at the absence of a bank? There is no mention of the fate of these clients who seem to have quit the debt-game.
The reasons cited for this decline are reasonable: financial crisis, slowing remittances, slowdown of donations and investments, crises, dodgy data etc. However, two are worth exploring in more detail:
Misaligned incentives: perhaps Larry slipped this in following my book, as it’s a central theme of my concerns: many MFIs are rewarded for NOT serving the poor. That it’s taken 30 years to realise that the age-old principal agent problem also occurs in developing countries is sad, but it seems to be firmly on the table now. Chuck Waterfield described this even more succinctly in the KRO-Reporter documentary: “We see a transfer of wealth from the bottom of the pyramid up to the very very top 1% of the pyramid. The rich getting richer off the very poorest in the world.” At least the cat is out of the bag on this one. When you pump money into the microfinance funds or peer-to-peer platforms, ask what their incentives are, not just yours or those of the poor.
But Larry’s second confession should send a serious shiver down our spines: “For many years, the indicators used to measure microfinance performance have focused on numbers of clients and the sustainability or profitability of the institutions that reach them. These indicators tell us little about whether we are achieving the real aim of microfinance”. Bingo. They’ve got it, at long last! Getting a loan and repaying it does not constitute development. Anyone with a credit card can sympathise.
So, when you look at Kiva, Opportunity International, Deutsche Bank, Calvert, Triple Jump, BlueOrchard etc., all the usual suspects basically, and they proudly announce how many billions of clients they “serve” and how they are “growing” each year, here’s the bottom line from the horse’s mouth – it’s meaningless. It has nothing to do with poverty alleviation. Milford Bateman has been making this point for a decade, to deaf ears. He may sneak a sip of champagne at this long overdue acknowledgement, particularly from an established industry insider.
Indeed, when discussing the poor quality data Larry mentions that when MFIs start measuring actual poverty reduction they “often find that the number of the poorest that they are serving is less than they originally estimated”. Or, to put it another way, they demonstrate that the spin they used to raise all that financing over the years was in fact bull****. Larry concludes the section with a frank acknowledgement that the Summit Campaign is no longer on track to achieve its 2015 goals. Respect.
There’s then a digression into mobile phones, as is fashionable nowadays. Annibale goes off on some rant about it, courtesy of sponsoring the document, but Larry sums it up concisely: “So far, though, digital technology has provided more promises than results”.
The next section deals with the psychology of scarcity, and is a fine read. It’s a concise introduction to some of the game-theory/behavioural economics that has been applied to microfinance, and although it doesn’t really explain the current mess of the microfinance sector, it’s well written and informative. Even the break-out boxes are informative. But it seems out of place until one gets to the next chapter on developing actual products, which is dominated by two success stories, each with 98% of clients being catapulted out of poverty. Interviews are with the people who run the programs, so perhaps not surprising. However, Larry does slip in some reassuring comments about microfinance having a positive impact from Esther Duflo, a respected academic: “These are very, very good results… I don’t think you could have expected anything much better”. As ever, don’t throw the baby out with the bathwater.
Then again, one would need to see the context of this quote. If you expected microfinance to be 95% useless and demonstrated that it was in fact only 90% useless this quote might still apply. She was examining BRAC-style graduation programs which combine microfinance with food support, training etc. This is supportive of “Microfinance plus” – combining a loan with actual tangible additional benefits, rather than a stand-alone credit card. Another positive step in the right direction.
Of course there is then a plug for the Seal of Excellence, Larry’s baby that will hopefully separate the wheat from the chaff in the microfinance sector. I am yet to be convinced that the Smart Campaign is capable of achieving any improvement in microfinance under its current structure, and its ongoing refusal to acknowledge the rights of children of microfinance client irks me. They cannot accept the idea that developing countries do actually have laws on child labour which MFIs ought to adhere to. Turning a blind eye is natural when the practice is rampant and sufficiently emotive as to cause a huge problem, but this will come back to haunt them. My views of Smart Campaign have been discussed elsewhere, I shan’t repeat them here, but come on Larry – put the kids’ rights on the list! Exploiting their parents is one thing, but give the kids a fighting chance. Smart depend on your endorsement, they are dead in the water without you, use some negotiating power to force this onto their list. Sure, their paymasters Accion will resist it, but stand firm!
Interestingly there was even a decent plug for SME funding – the tier above microfinance, i.e. not just the trinket-vendors. This is the direction quite a few investors are edging towards now, the so-called “gazelles” of business that actually generate employment, transfer skills, pay tax and stand a chance of leading to the actual industrial development that the entire developed world relied on since the Industrial Revolution. Bring it on.
So, overall, a decent paper, albeit littered with marketing. Long gone are the days of naive optimism. There are a few confessions, acknowledgements that things have gone wrong or could be done better, and only mild reliance upon heart-warming stories and nice photos. Not a single goat or sewing machine is mentioned – always a good sign.
But it falls short in a number of regards. First, Larry fails to address the issues of extortionate interest rates, as well as the frauds and deceptions at the microfinance investment funds. His only solution to deal with the latter is that investors “should request information on client level outcomes”. Rubbish. These funds need to be formally regulated like any other investment fund – their entire structures and motivations are geared to achieve sub-optimal or harmful results for the poor and the serve principally themselves. They stand accused of some pretty heinous crimes that none have denied, none have commented on, none have demonstrated that they have made the slightest efforts to correct. There remains an utter lack of transparency in the vehicles most investors entrust as intermediaries to reach the poor (Deutsche Bank, Citi, Deutsche, Kiva, Triple Jump, ASN – recently nationalized, Oxfam Novib, Calvert Foundation, Incofin, BlueOrchard etc). Until this part of the sector is overhauled improvements will be minimal. Admittedly it appears BlueOrchard is going down the tubes currently, so that might be one less to worry about soon.
It’s interesting to note that in Larry’s review of my book he acknowledges precisely these problems, but they earn no mention in this publication, sponsored of course by one of the worst offenders.
The other elephants in the room that evaded the report are mass exploitation of the poor, perhaps because the world leader in this regard, Banco Compartamos, is the baby of Accion who finance Smart and would rather avoid too much discussion of charging poor people rates exceeding even 200% in some cases. The child labour issue remains firmly brushed under the table. There is not much discussion on (improved) regulation, nor any tangible suggestions of how transparency could be actually improved, just mild lip-service to the concept. No pressure on Kiva to declare the actual interest rates the poor pay, no pressure on MIVs to declare who they invested in or how their investments treat their clients – this was a missed opportunity. But sponsored by Citi, reviewed by GFUSA, wedded to Smart and written by the former head of Opportunity International, actually I had lower expectations, so am comparatively pleased.
But, for a summary of the state of the sector, it fails to explain one of the principal reasons why microfinance is in decline: we entrusted the management of the capital flows to a bunch of amateurs and crooks. This surely deserved a mention?
It’s worth a read, but don’t think this is going to resolve the real underlying problems. Greed, conflicts of interest, a lack of transparency, sloppy data and deliberate ignorance of key issues lead me to conclude that things will get worse before they get better.
But what’s the alternative? Larry’s treading a fine line here, and frankly I don’t know how he could better play his cards without pissing off enough people to seriously jeopardise his position. It isn’t perfect, but it’s a step in the right direction. I would personally take a firmer stance, and I wouldn’t take a dime of the known culprits. But I would probably find myself lynched by the Wall Street folk.
Put this into the broader picture for a moment. MIVs are feeling the pressure right now. BlueOrchard just hired their 5th CEO in 20 months, and look like a dead duck lingering in the water. The media backlash against microfinance has been fairly brutal. The general public are increasingly sceptical. Regulatory pressure is mounting. Norway pulled out of microfinance entirely. Dutch retail microfinance funds are no longer classified as “ethical” for tax purposes. Criticism of microfinance is now acknowledged. When folk like Larry Reed are willing to stand back and admit mistakes, I am reminded of the narcissistic idolatry of microfinance promoted by his predecessor, Sam Daley-Harris. We’ve moved on since those days. Yunus isn’t banging on about poverty museums much anymore, and is clearly deeply concerned to face the media. He’s also been conspicuously quiet on the topic of extortionate interest rates since the LAPO scandal broke.
Microfinance has fallen from its pedestal as the miracle cure for poverty, and acknowledgement of failure is the first step to finding a solution, so in this regard this document represents a step forwards. There will be fierce resistance to maintain the status quo by those who benefit most from it (they mostly sit in Washington, Geneva, New York and Amsterdam, not in Haiti or Burkina Faso), so we cannot expect this sluggish, evangelical sector to change its stripes overnight. Improvements are possible, if we chose to react constructively.
So, Larry, well done. We know your hands are a somewhat tied, but turn up the temperature a little higher, watch these guys squirm. Only when they squirm or go silent are you really making an impact. And spare a thought for the kids at least.
Thanks a lot for this blog. I started in micro-finance a year ago, just going with the concept as more effective than charity. (Also, to be clear, uninterested in profit, but rather seeing my money work better – from your blog it isn’t clear to me whether you see it as a financial investment?) Yes, I’m with Kiva. I was very busy at the time, and a year later I have a chance to follow up on my scepticism.
However, I’m not sure how to use my money better, and I’m so far not convinced it’s generally being badly used now, when I consider specific loans. Will you give me a little feedback on this?
First, I’m assuming that Kiva’s “Portfolio Yield” which it claims includes both interest and any charges, is accurate. (Am I wrong?) I’m ignoring their “Profitability” as easier to manipulate. I’m also assuming that the default rate is irrelevant because I’m the one who loses. I have to ignore inflation, I don’t know whether figures are including it or not.
One loan I have: $1000, Ecuador, 15% yield, 8 months. An online APR compound interest calculator tells me he will repay $57 more than he borrowed. Bearing in mind that this is a small loan and I can imagine all kinds of practical costs involved that a high-street bank wouldn’t have to worry about, this sounds very reasonable to me. If he uses the money profitably, he could do very well out of it.
At the other end: $1375, Peru, 25% yield, 14 months. I make it $224 dollars extra repaid. That, I’m less comfortable with – I can imagine that being useful to help with cash-flow but really impacting profitability of most ventures.
Do you agree with those conclusions or am I missing some facts?
The best idea I have from reading your blog (and reasoning above) is that if I use (let’s call them) portals like Kiva or MyC4 and I pick out loans that have reasonable rates, my money is probably not being squandered between myself and the borrower.
I think that most charities have their own different, but enormous set of problems in using money for effective development, so the above seems like a good option.
I’d really value your feedback on that reasoning – and also whether there are any completely different options I should consider.
Hi Duncan,
Good questions. On the topic of whether Kiva’s portfolio yield is an accurate description of the actual APR to the end borrower, my answer is a resounding “NO”. I did a blog post on this topic:
http://blog.microfinancetransparency.com/whats-wrong-with-kivas-portfolio-yield-statistic/
What you will see is that often the portfolio yield as stated is widely different (and below) the actual APRs as calculated by the US-based NGO http://www.mftransparency.org, run by highly-respected microfinance veteran Chuck Waterfield – an active critic of extortionate interest rates. The reasons are explained in the blog post, but basically amount to accounting differences, and that they ignore the opportunity cost of savings. Stating that the portfolio yield includes all costs to the client is nebulous, as it depends on how the MFI reports “all costs”, according to the rules of the country in question. A quick look at this blog post will reveal why youhave to be very cautious using portfolio yield as a proxy for APR. Also, bear in mind that both the MFI and Kiva have a vested interest in understating the interest rates, to avoid reputational problems. It is mightily convenient to Kiva that the portfolio yield statistic does precisely this, so when reading their explanations for using this flawed statistic, bear this in mind.
But, it is interesting that you mention two P2Ps: Kiva and MyC4. While they both offer loans that often have high APRs, and occasionally through the same MFIs, MyC4 is able to state the APR to two decimal places. I personally still find these a little high, but it raises the question: how is MyC4 able to cite these rates on a per loan basis, and Kiva not? Zidisha, a direct P2P (not going via MFIs), is also able to state the interest rates on an individual loan, and they are far cheaper than most Kiva or MyC4 loans. Are Kiva unable, or unwilling to publish the actual APR? This is an open question, but my suspicion is the former. They are unable, because technically speaking Kiva is not a P2P, but a peer-to-MFI. Your funds go into the general pot of the MFI, although you are told your money went to an individual person. In fact you are “buying” the loan back from the bank, as the loan was disbursed some weeks or months ago. However, it is still unusual that the MFI is unable to tell Kiva the actual APR, and that Kiva are unable to pass this information to the lenders. Of course the MFI is able to state the interest rate on a loan, but Kiva deems this information not important. Kiva cite the yield on the “general pot” because this is precisely what you actually financed.
In the worst cases rates can approach 100%, and the famous case of LAPO is an example of how this can go badly wrong. Kiva had lent $5m to LAPO before the NYT exposed the actual activities and Kiva promptly pulled out. This is described in detail in the book. Of sincere concern is that Kiva clearly knew what was going on at LAPO and turned a blind eye for years, until it hit the press, when they panicked. How many more cases are there like this?
You then mention two countries in particular, Ecuador and Peru. Actually, these are fairly tightly regulated countries with very fair interest rates. Particularly in the case of Ecuador, interest rates are capped by the regulator (the maximum APR allowed is approximately 30%), so you are pretty safe in such countries. Thus, my advice to people who absolutely insist on using Kiva is to gain confidence not from the integrity of Kiva and the information presented by Kiva, but lend only in countries with strict regulations and client protection. Ecuador certainly fits these criteria.
Your broader question is whether lending on these platforms is a good idea at all, and whether there are alternatives to microfinance. Frankly, I do not lend via Kiva, and have withdrawn my money from MyC4 after I found their interest rates became excessive. For example, they lend via Tujijenge Tanzania who charge 50% simply for lending your money. I am all for people earning an interest rate on money they lend, but this MFI is not even lending its own money. I am also in favour of the MFI charging a reasonable commission for lending other people’s money, to cover operating expenses etc, but 50%? This seems excessive to me, and there are broader problems with this MFI that resulted in my deciding to withdraw from MyC4.
I did a radio show with Rose Aguilar on KALW last year in San Francisco, home of Kiva. Kiva refused to join the interview, but US-based P2P Zidisha did, and we had a fascinating conversation which you can find on the media tab on my website or Google it. I have subsequently looked at Zidisha in some detail and like it. I am unable to comment formally, as I have not seen the raw data, but I note that Kiva is furiously trying to replicate the Zidisha model with Kiva Zip. When I have studied Zidisha in more detail, and seen some results (it is relatively young) I will blog about it. Interestingly one of the big lending groups on Kiva, called Milepoint, have recently started shifting towards Zidisha. I can’t endorse Zidisha formally, but all I can say is that I am watching them carefully, have put a few hundred dollars on the platform, and am waiting to see, but signs are good so far.
So, the ultimate question is really “does microfinance work?”. This is a huge debate, and the evidence is indisputably that it is not working to the extent the hype and PR would have had us believe. Academic scrutiny of microfinance has been pretty devestating, and if you read Roodman, Chang, Stewart, Duvendack, Harper or Bateman you will certainly become a little concerned. I think it can and does work in certain circumstances, in certain places, for certain people. The ability to find out when it is working, and to identify a good MFI, is challenging and requires extensive knowledge and experience. All I can say, by way of generalisation, is that the good guys exist but are few and far between. I try to explain the ways in which an investor can seperate the wheat from the chaff on the website and in the book. But the sector is awash with cash, if anything the problem is over-indebtedness, not a shortage of capital, so the question is perhaps “would I be better off buying a mosquito net for an African family in a malarial area than lending to the same family at 80% per year?”, and my answer would be “probably yes”. Call me old-school, and I am not saying these areas are not also blighted with fraud and inefficiency, but education, hospitals, empowerment initiatives etc. do deserve a second glance. For example, if I wish to support the women’s movement I would rather support an institution such as the Global Fund for Women or Mamacash than lend to a bunch of poor women via some opaque MFI. Have you ever wondered why it is that the women’s movement has been very slow to embrace microfinance, despite the rhetoric about it being so great for women?
So, I have probably confused you more than enlightened you here. There are no easy answers. Stick to regulated countries. Look at broader interventions. Be sceptical of microfinance, but do not throw the baby out with the bathwater – it is not all bad, but tread very carefully and ask the right questions.
As an aside, the issue of child labour in microfinance has been conveniently brushed under the carpet despite extensive evidence that it is occurring. This is a grave concern to me, and I would advise anyone with spare funds to invest or donate to do so with a specific focus on child welfare. Whether this is to an anti- child labour organisation, or to a microfinance network that explicitly protects the interests of children, this would be a minimum criteria for me. A few microfinance funds do have specific policies on preventing child labour, and these are the only ones I would even consider on a short-list, subject to passing a series of other tests. Even the so-called Smart Campaign, which claims to protect the interests of clients, fails explicitly to address the rights of children, so even an MFI that has endorsed or earned some certificate from them does NOT have to do anything to avoid the illegal use of child labour. It is entirely tolerated by the vast majority of MFIs and even the self-regulator, which is sad but true. This will be the next microfinance scandal.
So, if you proceed with microfinance, I would also suggest that you demand to know the specific policies in place, and monitoring, to ensure that the loans are not used to remove children from school and have them instead stack shelves. This is not an outrageous demand – it is simply demanding that the use of funds obeys the local laws regarding child labour. You would presumably not approve of MFIs lending to pimps or drug-dealers, but child labour is equally illegal but entirely tolerated in microfinance. As you search for funds or P2Ps that insist that funds are not used for such activities you will find your search is narrowed dramatically. Disgracefully few have any policies on this topic. Ask Kiva what their policy is to ensure children are not denied an education in order to work in a micro sweat-shop. I suspect you will get a nebulous answer about “concern for welfare of our clients” blah blah blah. Ask them what the actual interest rates are. There are lots of questions they are yet to answer. Then form your own opinion of whether this is a sensible organisation. I have formed mine!
Hugh,
I noticed your book in the ‘new books’ section of my local library and since I had attended a talk by John Perkins back when his ‘Confessions’ book came out, I was curious to find out more about the micro-finance industry. It was a great read, giving a clear picture of the reality out there.
Back in the mid 00’s I had seen some of the typical adds on the internet targeted to the ‘socially conscious’, ‘good samaritan’, but was skeptical of the claims.
You’ve done an admirable quest to bring the con game to light, although the con being perpetrated by the investors and administrators of the micro-finance industry was clearly an inevitable result.
The capital vampires and their administrators have shown time and time again that they will bleed every last dime from the ignorant, gullible public, whether investing or borrowing.
This was clearly just another in a long series of loan sharking cons with a feel good veneer for the hapless ‘conscious’ investors and the ignorant and unwitting poor.
Nobody goes to jail since everyone’s in on the take, from the investor, to the funds, to the MFI’s to the borrowers (until they have to pay back the loans).
This was and is just a micro version of the con that started to unwind in the US in 2007.
How many banksters or their administrators have gone to jail for that colossal theft, which is still continuing to this day.
If you saw the recent comment by token scapegoat Madoff, it’s clear that he’s pissed off that he’s sitting in jail while the rest of the crooks are still out there pulling in huge bonuses, with the con raging on. I’m guessing, from your own experience, that you conclude that he’s probably sitting there because he crossed the wrong fellow crook.
Anyway, I admire your tenacity, but don’t wear yourself out over this side con of the capital vampires.
I noticed on your website that you live in a remote area of South America where there’s no MFI and the locals are doing well anyway. I take this a good sign and a good step.
P.S. Watch out for the ‘alternative’ energy con! It’s the next big thing!
George Tirebiter
Hi George,
Thanks for the comments, and I am glad you enjoyed the book. I share some of your cynicism that this was perhaps inevitable. When the likes of Deutsche Bank, ASN Bank, Citibank and the private equity vultures entered an entirely unregulated sector with vulnerable clients, anyone with half a brain should have smelt a rat. The IPO of Compartamos, and subsequently SKS, were similar alarm bells, but these folk have friends in high places. Accion, one of the principal vultures, is the main donor to the self-regulatory initiative ironically called “Smart Campaign”. They also were a major investor in Compartamos, and their recent acquisition in Mexico charges an eye-watering 229% interest. However, they are immune from criticism as a) they are too big to criticise and wield a huge amount of power in the sector, financing far more people than you might initially thnk, and b) right up to Hillary Clinton supports them:
http://www.youtube.com/watch?v=YSQEq2l9td4
Note that she explicitly praises Accion, and slips in all the correct, hear-warming terms: building up businesses, financial inclusion, God-given skills, security etc. She also mentions her buddy Maria Otero, who was the CEO of Accion during the Compartamos IPO and pocketed a tidy $2m for her services (Tom Heinemann did an eloquent report on this), before spinning through that lovely rotating door straight into the White House. If this doesn’t have a certain rat-like smell to it, then Bernie Madoff is innocent!
But, don’t throw out the baby with the bathwater. How much microfinance is utter nonsense and harmful to the poor while deceptiove to its investors? 50%? 90%? 99% perhaps? But it is not 100%. There still remain a few decent players out there who do actually do what it says on the packet. They are like gold-dust, hard to find, and under increasing pressure to sell out. Many have, but a few gems remain. So, while my advice to the “unsophistated” investor is simply “don’t invest a dime in microfinance”, if you know what you’re doing and can identify the gems, there are still a few decent players who need capital and will use it wisely. Good luck finding them, and assume “guilty until proven innocent” is my advice. But first and foremost, question the integrity of the P2P, fund or whatever intermediary, even before questioning the integrity of the MFI they invest in. This is where the problem lies. The MFIs merely dance to the tune the funds play.
But change is afoot. BlueOrchard are suffering immensely, as Dan Rozas’s piece suggested. He also anticipates a new crisis imminently, and I am inclined to agree. The nationalization of SNS bank, who own ASN Bank 100%, will likely see a reduction in the ASN-Novib fund, and the ethical status of retail investments in microfinance in Holland was recently removed, so Dutch microfinance does look a little gloomy right now. The KRO-Reporter documentary based around my book did little to help them. The good news is that the vultures are slowly waking up to the fact that the cat is out of the bag, people have generally worked out this is largely a scam. The poor Kiva-users are blissfully unaware but one wonders whether the majority of them actually bother to read even the Kiva website, let alone anything slightly more objective. But while I applaud this new-found realisation that this was a castle built on sand, as UK academic Maren Duvendack famously suggested, I am concerned for the 1%, 5%, 10% perhaps who are actually doing a good job.
Of course no one ever goes to jail. I took Triple Jump to court and they were found guilty, but there were no consequences for them until adverse publicitly damaged their reputation. They continue their merry scam to this day. The thing is, if you speak off record to almost anyone in the sector, they acknowledge this is a joke, but on record they have toplay the game, because their salaries depend on it. These people may be vultures, but they are not stupid, and nor was Madoff. Madoff’s mistake was playing around in an SEC-regulated environment, the microfinance vultures are extremely careful to avoid any sensible regulator, and do whatever is required to avoid actual regulation, preferring instead “self-regulation”, run by their own cronies and insiders to keep up appearances to the outside world that all is well. It’s not, and people are waking up to this. Welcome to the real microfinance revolution!
Seeking to control MFI irnsteet rates because it taps priority sector lending channels of Banks is like asking corporate houses to cap their export profit margins because they too draw Export credit that falls under the PSL category Not awkward enough ?Buffer built by MFIs also go towards extended supply chain initiatives like servicing the consumer product needs of the poor using the same network that gets established for pureplay money lending If the govt still insists on MFI curbs, relatively less harmful option may be a cap on MFI dividends to shareholders since profits plowed back into expansion benefits new borrowers. This will still discriminate against MFIs since even large corporates hardly promote financial inclusion, yet face no dividend cap.
With MFIs in India the issues are also aunrod what qualifies as priority sector lending (so banks can lend MFIs money to meet PSL quotas) and whether MFIs can take deposits (which will negate the need for expensive bank loans for the MFIs)The argument that the MFIs are making high profits is ridiculous, since the alternative is way too high an interest rate. On the other hand, they tend to fund only income generating sources, but we are going to reach a scale where debt will be needed against collateral (which still goes to the moneylenders for say a marriage or education). Still, that’s no reason an investor should not exit the business at a profit just when there are other investors willing to pay much higher prices; that they exit at a profit is not about them looting investors, it’s a function of the greater fool theory. Okay, not politically correct, but Reliance Power did that too, as did many government IPOs recently. In fact, if anyone’s really looted the poor man, it has been the recent PSU IPOs like NTPC and NHPC, where they used public sector money from other PSUs to garner subscription. That money could have been lent to poor people at affordable rates too, for arguably a far greater return. In general I’d ignore the arguments about usury, and focus on the real problems MFIs face overindebted consumers, debt rollovers to hide NPAs, or crisis management. I remember us discussing angel convertible debt at 30% to startups the effective interest rate charged by MFIs is far lesser.