Important Facts: In 2006 the founder of the Grameen Bank in India was hailed as an innovator for the poor and received a Nobel Prize for his work in developing what has been termed microfinance. Today that whole effort is under attack by governments and many advocates for the poor as it has started to look more like loan sharking than an opportunity for the poor. The concept was simple enough – make very small loans to people so that they could purchase items that would underpin small business. The problem is that many of these people were later unable to pay the loans back and the lenders have been raising their rates to cover these expected losses. The average rate now is between 20% and 50% and many millions of poverty stricken people are now saddled with debts they can’t pay. It is a familiar dilemma.
Analysis: The microfinance organizations (including the Grameen Bank) now face essentially the same issue as the Payday loan company in the west. The people they lend to are the most likely to default and thus the lender has an incentive to cover that loss with rates that are very high, thus making it more likely there will be more defaults. It is a vicious circle but the root of the problem is that lending to the very poor and financially strapped is not a good business proposition. Courtesy Dr. Chris Kuehl Armada Corporate Intelligence and BIIA Board Member
BIIA Comment: Microfinance is a noble concept however without a functional credit information system to track performance of the loan and a history of past credit transactions the Microfinance system is doomed to fail. The main problem lies in the fact that there is hardly any information available on the borrower, thus lending without information is tantamount to flying blind