Predatory Microlending Schemes

imagesmuhammad-yumus-smallNew Orleans I have never been a huge fan of the widely touted claims of microlenders that small loans – debt by any definition – are a successful poverty reduction strategy. At best they are an “employment acquisition” scheme for some select people too often within the informal or home-based economy. At worst they are cynical and predatory. Despite never having been willing to drink the Kool-Aid on microlending, I still thought it had some value for some people in some circumstances. Increasing reports of accelerating private sector domination of microlending, excessive and predatory interest rates and practices, and the global economic recession have intensified my concern that this is no longer a scheme, but now a full blown scam.

Dean S. Karlan, a Yale econ prof, was quoted along the same lines in a Times story recently by Neil MacFarquhar: “The lesson is simply that it [microlending] didn’t save the world. It is not the single transformative tool that proponents have been selling it as, but there are positive benefits.” So, let’s go with D minus but A for effort.

But some of it simply sucks. Interest rates in Mexico and Nigeria pushing up to and over 100% on a loan, and in the case of a big Mexican outfit, Te Creemos, a 125% annual effective rate. Loan end rates still averaging 35%, which is equivalent to payday lending schemes, and which we unabashedly label as predatory lending in ACORN Canada’s long campaign in this area over the last number of years.

We have discussed Kiva several times before in these pages. They along with others like Microplace that seek to link good hearted small donor-investors with good intentioned poor families, concede that they cannot “guarantee every interest rate they quote.” This is a problem both in the way they are “packaging” loans from bigger microlenders and their general transparency. On the other hand CARE, the big USA NGO, was not only transparent, but unseemingly boastful about its ability to parlay an initial $3.5 million investment in microlending including almost a half-million in taxpayer dollars, to set up an outfit in Peru which they then flipped in a sale to Banco de Credito, a huge Peruvian bank, to the tune of almost $100 million, where they cleared $74 million on the deal. The heck you say!

Even Muhammad Yunus, the Bangladeshi Nobel Prize winner, who pioneered much of microlending and became its global voice and booster, seems disgusted by the way the worm is turning. He – correctly – argues that any interest rate above 10-15% (after cost of funds acquisition, though I’m not sure what he means by that?) is predatory. Fair enough. By those lights almost 75% of microlenders are now in the predatory space or “red zone,” as he calls it. With 60% of microlending now controlled by banks and finance firms, I’m betting a lot of the red zone has names we know.

This is less about “I told you so,” and more about the desperate need of poor people for hard cash that is now driving them to grab at precious dollars to survive, no matter what the cost. That, my friends, is the definition of a predatory situation, and has to be stopped.