Setting Standards for Microfinance

[flashl]

Yahoo
By Steve Hamm Tue Jul 29, 8:08 AM ET

In an effort to head off a potential crisis in the fast-expanding microfinance industry, its leaders are adopting global truth-in-lending standards and creating a system for comparing loan terms offered by competing lenders. To manage the effort, a new self-monitoring organization, MicroFinance Transparency, is being set up as the industry's policeman. The goal is to prevent companies from taking advantage of poor people with high interest rates and misleading credit offers.

The initiative was announced on July 28 at a microcredit conference in Bali by Chuck Waterfield, a professor at Columbia University who spearheaded the initiative, and Nobel Peace Prize winner Muhammad Yunus, who launched the microcredit revolution in Bangladesh 30 years ago with his Grameen Bank. "Microfinance emerged as a struggle against loan sharks, so we don't want to see new loan sharks created in the name of microcredit," Yunus tells BusinessWeek.

If the industry doesn't curtail abuses and confusion, it faces the prospect of government crackdowns and donor funds drying up. Since Yunus pioneered the idea of lending small amounts of money to poor people without demanding collateral, the phenomenon has spread worldwide. These days, thousands of organizations are making loans to tens of millions of borrowers -- usually to help them set up or expand small businesses.

Reports of High Interest Rates

Today, there are basically two kinds of microlenders: nonprofit outfits like Grameen and for-profit lenders, including traditional banks that are making forays into this market.

Starting last year with an expose of lending practices in Mexico by BusinessWeek (12/13/07), a steady drumbeat of articles critical of high interest rates charged to poor people have appeared in various publications. Yunus said he was alarmed by the direction the industry was taking (BusinessWeek, 12/13/07). "I felt so bad," he says. "I made this thing and they came in and abused it. What a way to discredit a whole idea!"

Unfortunately, profit is now synonymous with 'organized robbery'.

[Warpy]

1. I'd advise anyone who makes microloans to check it out carefully

and keep those interest rates as far under 20% as you can.

I go though Kiva and Grameen. The loans are typically under $3000 and so far I've been 100% repaid, although as the world economy sours, the delinquency rate has inched up. Since I don't lend anything I can't afford to lose, I relend everything that is paid back.

Banks, when they do extend small loans to poor people without collateral, typically charge in excess of 30%.

It's still the best way I know of to change the world, one poor person at a time. Heifer International is another great program, straight charity for people who would rather go that route.