Yunus On Loan Sharks

Nobel Peace Prize winner Muhammad YunusImage by amioascension via Flickr
Muhammad Yunus: The New York Times: Sacrificing Microcredit for Megaprofits: one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks...... India’s crisis points to a clear need to get microcredit back on track. ..... Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. In 2007, Compartamos, a Mexican bank, became Latin America’s first microcredit bank to go public. And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering. ...... Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity. ..... these commercial organizations raise larger sums in volatile international financial markets, and then transmit financial risks to the poor. ..... commercial microcredit institutions are subject to demands for ever-increasing profits, which can only come in the form of higher interest rates charged to the poor, defeating the very purpose of the loans. ...... Grameen Bank .... has 2,500 branches in Bangladesh. It lends out more than $100 million a month, from loans of less than $10 for beggars in our “Struggling Members” program, to micro-enterprise loans of about $1,000. Most branches are financially self-reliant, dependent only on deposits from ordinary Bangladeshis. When borrowers join the bank, they open a savings account. All borrowers have savings accounts at the bank, many with balances larger than their loans. And every year, the bank’s profits are returned to the borrowers — 97 percent of them poor women — in the form of dividends. ..... we charge 20 percent to the borrowers. .... every country where microloans are made needs a microcredit regulatory authority
I share Yunus' aversion to "loan sharks." I grew up in the Third World. I know what loan sharks are. I saw too many of them in action while growing up. It is not a pretty sight.

But I do not share his aversion to the for profit model. His aversion for the for profit model reminds me of Einstein's aversion for quantum mechanics. Yunus is the father of the whole concept, but I firmly believe unless you cross the line and also bring for profit ways into the picture, poverty will not be eliminated
Muhammad Yunus, founder of Grameen BankImage via Wikipediafor a long, long time.

I think South to South lending can help, and that clearly has been Ynus' model, but through that model you will not be able to plough trillions of dollars that are needed to eliminate poverty. The money simply is not there. You have to go global. Lending out $100 million a month is nothing in a country the size of Bangladesh. That is not even $1 per person.

I agree with Yunus on the need for a regulatory framework. There has to be a cap on interest rates. And collection practices have to be acceptable.

The for profit model should be able to provide more loans to more people at lower interest rates and should have the most humane collection practices. Capitalism works. But ground rules are necessary.
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Rajan Alexander said…
Make no mistake. The days of MFI as the primary vehicle for promoting financial inclusion in the country is over.

Though MFIs could have claimed the latter status till now; the scenario has changed. The sector's strategic significance has been downgraded and the new policy framework would encourage other vehicles like direct bank lending.

While Malegam report did not explicitly state as a recommendation, the implications implicitly is that it wants to contract the growth of the MF sector and thereby discourage PE investment in the country by creating a significantly lower growth environment for the sector.

Sooner the MF reconcile to the emerging policy framework, the better they can adapt

Read More:
India's Central Bank finally give a loud unambiguous policy signal: MFIs will not die, only need to be castrated. Part 1

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