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Profiting from the poor: The ethics of microfinance

   /   Apr 14th, 2010News

Thirty years ago, microfinance was a crazy idea. The notion that villagers, or slum dwellers, let alone women, could manage loans, and repay them dependably, was considered absurd. When I wrote my first book on the Grameen Bank in the early 1990s, many experts were still saying the bank would “burst like a balloon.” Now, as the NY Times reports in an unmissable article, microfinance is rapidly being commercialized — and, in too many cases, it’s turning into another form of predatory lending.

[T]he phenomenon has grown so popular that some of its biggest proponents are now wringing their hands over the direction it has taken. Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more.

Here’s the dilemma: Commercial microfinance, if handled responsibly, could open up huge capital flows for financing small loans. Philanthropy alone can’t supply the credit needs of the world’s poor; we need business to get into the game. But how do we keep profit-oriented microlenders from exploiting the poor? One solution is more transparency; another is tighter regulation, and the third is more competition. Right now groups like Planet Rating and The Mix play a key role publicizing the performance of microfinance institutions.

Let’s be clear. Microfinance lenders should only be considered social enterprises if they place social impact at least on a par with profitability. The test is how they balance these two objectives. Do they overlook poorer borrowers in favor of wealthier ones? Do they charge the poor exorbitant interest rates? Do they achieve outsize profits because their borrowers have nowhere else to turn?

We need to remain vigilant as the field continues to grow. The current mortgage crisis occurred because banks ignored the social consequences of their lending. If the same happens in microfinance, the result will be suffering around the globe.

Photo: picture-alliance / Godong

3 Responses

  1. Paul Hudnut says:

    First, congratulations on launching Dowser!
    Second, thanks for offering a sound perspective on this debate. There are microfinance industry groups, such as the Center for Financial Inclusion (with which I am involved) and CGAP that are working both to achieve the balance between social and financial objectives. By helping one end of the microfinance spectrum to become more sustainable (and impactful) and helping the other be more transparent (and socially valuable).
    As you know, this is not a new debate just because it showed up in the NY Times… the Compartamos (Mexico) IPO fueled similar discussions a few years ago, and the recently announced SKS (India) IPO will likely do the same.
    The work of MIT’s J-PAL group, which has studied the impact (or lack of impact) of microfinance on poverty also needs to be considered in these discussions.
    Lastly, microfinance was really the first social enterprise industry, and it is to date, the most successful. That it is having growing pains is no surprise. Its leaders have served as important role models for entrepreneurs looking at energy, public health, microfranchising, and other societal needs.

  2. N.J. Joseph says:

    Dear Mr. Bornstein,

    Sometimes we try to solve our socio-economic problems without addressing
    the root cause. Prevention is always better than cure. With different faiths and
    beliefs, we ignore and forget the truth, that we all are the children of the same
    God. Thus, it becomes an obligation to act upon love and to do the right thing.
    Freedom is a factor of co-existance, without greed and ignorance, and peace
    is the end result. Your thoughts please………..Thanks.

    N.J. Joseph
    (609) 404-0248

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