Wednesday, December 29, 2010

Microfinance Fail

Striking the right balance is hard. The minute microfinance moved into the world of IPOs, it failed, and spectacularly:
More than 70 people committed suicide in the state from March 1 to Nov. 19 to escape payments or end the agonies their debt had triggered, according to the Society for Elimination of Rural Poverty, a government agency that compiled the data on the microfinance-related deaths from police and press reports.

...As India struggles to provide decent education, health care and jobs to millions still locked in poverty, microlending -- the loaning of small sums to the world’s neediest people to help them earn a living -- has taken a perverse turn.

Microcredit has become “Walmartized” by unrestrained selling of cheap products to the poor, says Malcolm Harper, chairman of ratings company Micro-Credit Ratings International Ltd. in Gurgaon, India.

“Selling debt is like selling drugs,” says Harper, 75, the author of more than 20 books on microfinance and other topics. “Selling debt to illiterate women in Andhra Pradesh, you’ve got to be a lot more responsible.”

...“Microfinance was supposed to empower women,” he says. “Microfinance guys reversed the social and economic progress, and these women ended up becoming slaves.”

...The upheaval in Andhra Pradesh is a long way from the vision of Muhammad Yunus.

The former economics professor won the Nobel Peace Prize in 2006 for his pioneering work in Bangladesh providing small sums to entrepreneurs too poor to get bank loans.

Yunus, 70, discovered more than three decades ago that when you lend money to women in poverty, they can begin to earn a living, and most of them will pay you back.

Yunus started the Grameen Bank Project in 1976 to extend banking services to the poor. Since then, it has lent $9.87 billion and recovered $8.76 billion; 97 percent of its 8.33 million borrowers are female.

Yunus says he’s not against making a profit. But he denounces firms that seek windfalls and pervert the original intent of microfinance: helping the poor.

The rule of thumb for a loan should be the cost of funds plus 10 percent, he says.

“Commercialization is the wrong direction,” Yunus says, speaking in a telephone interview from Bangladesh’s capital of Dhaka. “An initial public offering is the triggering point for making a lot of money personally as well as for the company and shareholders.”

David Gibbons, chairman of Cashpor Micro Credit, a nonprofit microlender to the poorest women in India’s Uttar Pradesh and Bihar states, says public, for-profit lenders face a conflict.

“They have to decide between the interests of their customers and interests of their investors,” he says.

Gibbons, 70, says he learned that lesson when he tried to raise 4 million pounds ($6.2 million) from two wealthy London- based nonresident Indian investors in November 2006.

Talks failed because of differences over expectations for returns on equity and other contract terms, he says.

“That’s what made me think this just can’t be done,” he says.

...Overlending in Andhra Pradesh calls to mind the U.S. subprime crisis, says Lakshmi Shyam-Sunder, director of corporate risk at International Finance Corp. in Washington, which invests in microlenders.

“Subprime lending was initially seen as extending homeownership to poorer people, doing good,” Shyam-Sunder says.

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