Microfinance: Helping the Poor or Making Profits?

As I noted in the previous post, there are virtually thousands of microfinance organizations out there nowadays, yet they are not equally transparent and effective. Even more so, some so-called microfinance organizations have trailed-off from the original mission to help alleviate poverty and became regular profit-maximizing businesses that exploit the poor. That is exactly why microfinance movement was started by Muhammad Yunus in 1976: to give people an opportunity to lift themselves out of poverty and break their unhealthy dependence on money-lenders who were living off them.

Mr. Yunus divides all microfinance organizations into 2 categories:

1. Poverty-Focused Microcredit Programs, ex. The Grameen Bank.
These programs charge loan recipients interest rate starting at the market price of the cost of funds up until additional 15% to that price.

2. Profit-Maximizing Microcredit Programs.
These businesses charge more than 15% on top of the market price of the loan and, thus, in Yunus’ words, operate in moneylenders’ territory.

To the defense of the latter, Kiva.org, one of the most famous microfinance organizations, explains why microloans have to have high interest rates. It all makes sense, but in a nutshell, the poor have to pay for the bureaucracy of NGOs, i.e. transactions costs, staff meetings, monitoring, etc. While it is an undoubtedly reasonable argument, for me, low interest rates define an effective microfinance organization, such as Grameen Bank that somehow managed to do so. Another explanation of high interest rates, as Muhammad Yunus notes, is that it helps microfinance organizations become self-sustaining in a shorter period of time. Again a very logical reason, however, the poor should not have to pay for that. Intensify your fundraising outreach, write more grants, what have you. The poor should be nothing but the beneficiaries of the program! Besides, there are other ways of reaching self-sustainability, such as establishing savings accounts for the poor or giving the loans for all the upper classes with regular high-interest rates.

The list of exemplary (and not-so much) organizations based on the criteria I outlined above is right in the next post.