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Should banks be kept out of microfinance?

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  • karmayog - tanya
    Let a hundred flowers bloom Microfinance pioneer Muhammad Yunus has slammed the commercial banks and private equity firms which have piled on to the bandwagon
    Message 1 of 2 , Jul 31, 2008
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      Let a hundred flowers bloom
       
      Microfinance pioneer Muhammad Yunus has slammed the commercial banks and private equity firms which have piled on to the bandwagon that he got rolling in Bangladesh three decades ago. He says this has all the makings of another subprime crisis. The world’s poor will be enticed to take loans they cannot pay.

      There is no doubt that mainstream financial institu M icrofinance pioneer Muhammad Yunus has slammed the tions have rushed into microfinance. The issue that Yunus has raised at an annual industry meeting at Bali first came into prominence in April 2007, when Mexico’s Banco Compartamos raised money from the public by selling shares.

      Activists criticized it for making huge profits by lending to the poor. Many Indian banks such as ICICI Bank, too, have rushed off into microfinance territory. SKS Microfinance has raised venture capital from Sequoia Capital.

      There is no reason to hide microfinance behind a veil of morality. Let’s face it: It’s an awfully attractive business.

      The World Bank estimates that microfinance institutions charged an average 28% on the loans they made in 2006.

      It is returns such as these that have attracted the suits to the honey pot. One part of these high interest rates can be ex plained by the high risk that comes with lending to the poorest. The other part comes from the fact that there is still not enough competition in the business.

      The global microfinance rush is likely to push down interest rates in the future. The founders of Compartamos wrote in a June letter to their peers that the interest rates charged by their company has dropped from 115% to 79% over the past seven years.

      Microfinance is one of the great innovations of our age.

      The poor are constrained by the lack of credit and Yunus realized before anyone else that you can lend to the poor profitably. He worked through self-help groups. So do many others who follow in his footsteps. But if the goal is to provide more credit to the poor, he should realize that we need more types of microfinance organizations, not less. So what if a few of them come from the mainstream financial sector?

      Should banks be kept out of microfinance?

      URL: http://epaper.livemint.com/artMailDisp.aspx?article=31_07_2008_022_001&typ=0&pub=422

    • Madhav
      While the entry of banks and private equity has probably spread trhe microfinance net to a wider audience, for sure the original concept has been given the go
      Message 2 of 2 , Jul 31, 2008
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        While the entry of banks and private equity has probably spread trhe
        microfinance net to a wider audience, for sure the original concept
        has been given the go by. No longer is it a welfare measure intended
        to alleivate rural poverty...it has become just another segment for
        banks and NBFCs to lend.

        What will most certainly happen unless both the government and
        grassroot NGOs sit up now and take notice, the few small
        organisations will surely be tampled upon and swallowed up by the
        big fish. That said, the potential in this sector is huge and the
        big players will only go to areas where there is profit for them to
        earn....at other locations which are actually the places in dire
        need of such financing, but the propspects of profits are uncertain,
        it will still be upto the NGO sector to bridge the gap.

        What has to be understood is that microfinance is not just about
        lending money, it is also about nurturing a community, increasing
        the skillsets and knowledge levels of the borrowers, training them
        in trades which will earn them money, i.e. training them to fish
        which will sustain them for a lifetime, instead of just giving them
        a fish which will feed them for a day.
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