[Marxism] Microcredit loan sharks

Louis Proyect lnp3 at panix.com
Wed Apr 14 07:13:13 MDT 2010


NY Times April 13, 2010
Big Banks Draw Profits From Microloans to Poor
By NEIL MacFARQUHAR

In recent years, the idea of giving small loans to poor people became 
the darling of the development world, hailed as the long elusive formula 
to propel even the most destitute into better lives.

Actors like Natalie Portman and Michael Douglas lent their boldface 
names to the cause. Muhammad Yunus, the economist who pioneered the 
practice by lending small amounts to basket weavers in Bangladesh, won a 
Nobel Peace Prize for it in 2006. The idea even got its very own United 
Nations year in 2005.

But the phenomenon has grown so popular that some of its biggest 
proponents are now wringing their hands over the direction it has taken. 
Drawn by the prospect of hefty profits from even the smallest of loans, 
a raft of banks and financial institutions now dominate the field, with 
some charging interest rates of 100 percent or more.

“We created microcredit to fight the loan sharks; we didn’t create 
microcredit to encourage new loan sharks,” Mr. Yunus recently said at a 
gathering of financial officials at the United Nations. “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.”

The fracas over preserving the field’s saintly aura centers on the 
question of how much interest and profit is acceptable, and what 
constitutes exploitation. The noisy interest rate fight has even 
attracted Congressional scrutiny, with the House Financial Services 
Committee holding hearings this year focused in part on whether some 
microcredit institutions are scamming the poor.

Rates vary widely across the globe, but the ones that draw the most 
concern tend to occur in countries like Nigeria and Mexico, where the 
demand for small loans from a large population cannot be met by existing 
lenders.

Unlike virtually every Web page trumpeting the accomplishments of 
microcredit institutions around the world, the page for Te Creemos, a 
Mexican lender, lacks even one testimonial from a thriving customer — no 
beaming woman earning her first income by growing a soap business out of 
her kitchen, for example. Te Creemos has some of the highest interest 
rates and fees in the world of microfinance, analysts say, a whopping 
125 percent average annual rate.

The average in Mexico itself is around 70 percent, compared with a 
global average of about 37 percent in interest and fees, analysts say. 
Mexican microfinance institutions charge such high rates simply because 
they can get away with it, said Emmanuelle Javoy, the managing director 
of Planet Rating, an independent Paris-based firm that evaluates 
microlenders.

“They could do better; they could do a lot better,” she said. “If the 
ones that are very big and have the margins don’t set the pace, then the 
rest of the market follows.”

Manuel Ramírez, director of risk and internal control at Te Creemos, 
reached by telephone in Mexico City, initially said there had been some 
unspecified “misunderstanding” about the numbers and asked for more time 
to clarify, but then stopped responding.

Unwitting individuals, who can make loans of $20 or more through Web 
sites like Kiva or Microplace, may also end up participating in 
practices some consider exploitative. These Web sites admit that they 
cannot guarantee every interest rate they quote. Indeed, the real rate 
can prove to be markedly higher.

Debating Microloans’ Effects

Underlying the issue is a fierce debate over whether microloans actually 
lift people out of poverty, as their promoters so often claim. The 
recent conclusion of some researchers is that not every poor person is 
an entrepreneur waiting to be discovered, but that the loans do help 
cushion some of the worst blows of poverty.

“The lesson is simply that it didn’t save the world,” Dean S. Karlan, a 
professor of economics at Yale University, said about microlending. “It 
is not the single transformative tool that proponents have been selling 
it as, but there are positive benefits.”

Still, its earliest proponents do not want its reputation tarnished by 
new investors seeking profits on the backs of the poor, though they 
recognize that the days of just earning enough to cover costs are over.

“They call it ‘social investing,’ but nobody has a definition for social 
investing, nobody is saying, for example, that you have to make less 
than 10 percent profit,” said Chuck Waterfield, who runs 
mftransparency.org, a Web site that promotes transparency and is 
financed by big microfinance investors.

Making pots of money from microfinance is certainly not illegal. CARE, 
the Atlanta-based humanitarian organization, was the force behind a 
microfinance institution it started in Peru in 1997. The initial 
investment was around $3.5 million, including $450,000 of taxpayer 
money. But last fall, Banco de Credito, one of Peru’s largest banks, 
bought the business for $96 million, of which CARE pocketed $74 million.

“Here was a sale that was good for Peru, that was good for our broad 
social mission and advertising the price of the sale wasn’t the point of 
the announcement,” Helene Gayle, CARE’s president, said. Ms. Gayle 
described the new owners as committed to the same social mission of 
alleviating poverty and said CARE expected to use the money to extend 
its own reach in other countries.

The microfinance industry, with over $60 billion in assets, has 
unquestionably outgrown its charitable roots. Elisabeth Rhyne, who runs 
the Center for Financial Inclusion, said in Congressional testimony this 
year that banks and finance firms served 60 percent of all clients. 
Nongovernmental organizations served 35 percent of the clients, she 
said, while credit unions and rural banks had 5 percent of the clients.

Private capital first began entering the microfinance arena about a 
decade ago, but it was not until Compartamos, a Mexican firm that began 
life as a tiny nonprofit organization, generated $458 million through a 
public stock sale in 2007, that investors fully recognized the potential 
for a windfall, experts said.

Although the Compartamos founders pledged to plow the money back into 
development, analysts say the high interest rates and healthy profits of 
Compartamos, the largest microfinance institution in the Western 
Hemisphere with 1.2 million active borrowers, push up interest rates all 
across Mexico.

According to the Microfinance Information Exchange, a Web site known as 
the Mix, where more than 1,000 microfinance companies worldwide report 
their own numbers, Compartamos charges an average of nearly 82 percent 
in interest and fees. The site’s global data comes from 2008.

But poor borrowers are often too inexperienced and too harried to 
understand what they are being charged, experts said. In Mexico City, 
Maria Vargas has borrowed larger and larger amounts from Compartamos 
over 20 years to expand her T-shirt factory to 25 sewing machines from 
5. She is hazy about what interest rate she actually pays, though she 
considers it high.

“The interest rate is important, but to be honest, you can get so caught 
up in work that there is no time to go fill out paperwork in another 
place,” she said. After several loans, now a simple phone call to 
Compartamos gets her a check the next day, she said. Occasionally, 
interest rates spur political intervention. In Nicaragua, President 
Daniel Ortega, outraged that interest rates there were hovering around 
35 percent in 2008, announced that he would back a microfinance 
institution that would charge 8 to 10 percent, using Venezuelan money.

There were scattered episodes of setting aflame microfinance branches 
before a national “We’re not paying” campaign erupted, which was widely 
believed to be mounted secretly by the Sandinista government. After the 
courts stopped forcing small borrowers to repay, making international 
financial institutions hesitant to work with Nicaragua, the campaign 
evaporated.

A Push for More Transparency

The microfinance industry is pushing for greater transparency among its 
members, but says that most microlenders are honest, with experts 
putting the number of dubious institutions anywhere from less than 1 
percent to more than 10 percent. Given that competition has a pattern of 
lowering interest rates worldwide, the industry prefers that approach to 
government intervention. Part of the problem, however, is that all kinds 
of institutions making loans plaster them with the “microfinance” label 
because of its do-good reputation.

Damian von Stauffenberg, who founded an independent rating agency called 
Microrate, said that local conditions had to be taken into account, but 
that any firm charging 20 to 30 percent above the market was 
“unconscionable” and that profit rates above 30 percent should be 
considered high.

Mr. Yunus says interest rates should be 10 to 15 percent above the cost 
of raising the money, with anything beyond a “red zone” of loan 
sharking. “We need to draw a line between genuine and abuse,” he said. 
“You will never see the situation of poor people if you look at it 
through the glasses of profit-making.”

Yet by that measure, 75 percent of microfinance institutions would fall 
into Mr. Yunus’s “red zone,” according to a March analysis of 1,008 
microlenders by Adrian Gonzalez, lead researcher at the Mix. His study 
found that much of the money from interest rates was used to cover 
operating expenses, and argued that tackling costs, as opposed to 
profits, could prove the most efficient way to lower interest rates.

Many experts label Mr. Yunus’s formula overly simplistic and too low, a 
route to certain bankruptcy in countries with high operating expenses. 
Costs of doing business in Asia and the sheer size of the Grameen Bank 
he founded in Bangladesh allow for economies of scale that keep costs 
down, analysts say. “Globally interest rates have been going down as a 
general trend,” said Ms. Javoy of Planet Rating.

Many companies say the highest rates reflect the costs of reaching the 
poorest, most inaccessible borrowers. It costs more to handle 10 loans 
of $100 than one loan of $1,000. Some analysts fear that a pronounced 
backlash against high interest rates will prompt lenders to retreat from 
the poorest customers.

But experts also acknowledge that banks and others who dominate the 
industry are slow to address problems.

Added Scrutiny for Lenders

Like Mexico, Nigeria attracts scrutiny for high interest rates. One 
firm, LAPO, Lift Above Poverty Organization, has raised questions, 
particularly since it was backed by prominent investors like Deutsche 
Bank and the Calvert Foundation.

LAPO, considered the leading microfinance institution in Nigeria, 
engages in a contentious industry practice sometimes referred to as 
“forced savings.” Under it, the lender keeps a portion of the loan. 
Proponents argue that it helps the poor learn to save, while critics 
call it exploitation since borrowers do not get the entire amount up 
front but pay interest on the full loan.

LAPO collected these so-called savings from its borrowers without a 
legal permit to do so, according to a Planet Rating report. “It was 
known to everybody that they did not have the right license,” Ms. Javoy 
said.

Under outside pressure, LAPO announced in 2009 that it was decreasing 
its monthly interest rate, Planet Rating noted, but at the same time 
compulsory savings were quietly raised to 20 percent of the loan from 10 
percent. So, the effective interest rate for some clients actually leapt 
to nearly 126 percent annually from 114 percent, the report said. The 
average for all LAPO clients was nearly 74 percent in interest and fees, 
the report found.

Anita Edward says she has borrowed money three times from LAPO for her 
hair salon, Amazing Collections, in Benin City, Nigeria. The money comes 
cheaper than other microloans, and commercial banks are virtually 
impossible, she said, but she resents the fact that LAPO demanded that 
she keep $100 of her roughly $666 10-month loan in a savings account 
while she paid interest on the full amount.

“That is not O.K. by me,” she said. “It is not fair. They should give 
you the full money.”

The loans from LAPO helped her expand from one shop to two, but when she 
started she thought she would have more money to put into the business.

“It has improved my life, but not changed it,” said Ms. Edward, 30.

Godwin Ehigiamusoe, LAPO’s founding executive director, defended his 
company’s high interest rates, saying they reflected the high cost of 
doing business in Nigeria. For example, he said, each of the company’s 
more than 200 branches needed its own generator and fuel to run it.

Until recently, Microplace, which is part of eBay, was promoting LAPO to 
individual investors, even though the Web site says the lenders it 
features have interest rates between 18 and 60 percent, considerably 
less than what LAPO customers typically pay.

As recently as February, Microplace also said that LAPO had a strong 
rating from Microrate, yet the rating agency had suspended LAPO the 
previous August, six months earlier. Microplace then removed the rating 
after The New York Times called to inquire why it was still being used 
and has since taken LAPO investments off the Web site.

At Kiva, which promises on its Web site that it “will not partner with 
an organization that charges exorbitant interest rates,” the interest 
rate and fees for LAPO was recently advertised as 57 percent, the 
average rate from 2007. After The Times called to inquire, Kiva changed 
it to 83 percent.

Premal Shah, Kiva’s president, said it was a question of outdated 
information rather than deception. “I would argue that the information 
is stale as opposed to misleading,” he said. “It could have been a tad 
better.”

While analysts characterize such microfinance Web sites as well-meaning, 
they question whether the sites sufficiently vetted the organizations 
they promoted.

Questions had already been raised about Kiva because the Web site once 
promised that loans would go to specific borrowers identified on the 
site, but later backtracked, clarifying that the money went to 
organizations rather than individuals.

Promotion aside, the overriding question facing the industry, analysts 
say, remains how much money investors should make from lending to poor 
people, mostly women, often at interest rates that are hidden.

“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?”

Elisabeth Malkin contributed reporting from Mexico City.




More information about the Marxism mailing list