Macro Interest and Micro Loans

Financial Justice

20080916 Wall StreetShreveport An article in the NY Times asked a number of interesting questions about the $350 million IPO (Initial public offering) for SKS Microfinance including the push-out of the nonprofits by private investors, the use of the new money the nonprofits will still make along with where it will go and who will run it, and the disappearance of some entities and their board members in the wake of this IPO and their own private investments.  The article was in the business section and all of these questions are worth answering, though I wouldn’t hold my breath.   As interesting as all of these questions are, none of them get to the real point.

Why would there be an IPO and hovering investors in something that ostensibly is a tool for poverty reduction?  Why is there so much money to be made from the poor?  Are these loans predatory?

Part of the answer is well known and needs a much brighter light:  the interest rates on these loans are too high and verge on the predatory.  At the scale of these mega-microfinance outfits the business model is based on the gross profits from predatory interest rates.  We need to stop pretending microfinance at this level is about poverty reduction and be honest that this is simply a distribution system for high interest loans to the poor.

Esther Duflo, the well regarded, highly objective head of the MIT Poverty Action Lab, was the subject of a long piece in the New Yorker several months ago, which was interesting to me because she tried ever so gently to indicate that there was no real indication that micro-lending was doing much of anything to reduce poverty.

The more she and many others look at the claims versus the facts, the more clear it is becoming common sense needs to come to the fore:  debt cannot reduce poverty.

The disgusting and avaricious amendment to that simple truth is furnished in these new stories of private and institutional riches being created off the backs of predatory interest to the poor that we are now seeing.  There are too many wolves in sheep’s clothing.