Microfinance must move beyond loans to savings

February 18, 2011

By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

HONG KONG — Mohammad Yunus won the Nobel peace prize for pioneering microcredit. Now, Bangladesh plans to oust him from Grameen Bank, which he created, while microfinance is reeling from last year’s controversy in the Indian state of Andhra Pradesh. The model of offering loans to village start-ups too small for conventional banks still works, but microlenders must go beyond credit and help the poor manage the wealth their loans create.

Microlenders face two main accusations. One is that the $65 billion industry charges rates as usurious as the loan sharks it was supposed to supplant. Yet the usual 28 percent rate is no more than banks charge credit card customers for unsecured credit elsewhere. True, unscrupulous lenders add hidden charges. But even the poor know a bad deal when they see one. Here, consumer education and competition can only help.

The other allegation has more weight. Many poor borrowers are buried under too many loans. Critics blame overly aggressive marketing, but the real problem is one of identification. Recognising customers indebted to multiple lenders will require credit bureaus — a tall order in nations like India where even birth certificates are scarce. But governments should expedite the process. Microlenders have nothing to gain from borrowers defaulting.

Yunus himself has suggested that microlenders be run as not-for-profits, and their rates capped. That hardly offers a solution. Boosting regulatory restrictions would only make loans to the poor more expensive by increasing the cost of doing business. And making microlenders non-profit would substitute charity for the commercial discipline that makes microfinance more effective than aid.

Microlenders should, however, take a leaf from Grameen’s book. Grameen is run on commercial principles, and offers customers both savings accounts and insurance; indeed, its customers own 90 percent of the bank’s stock. Many of its rivals bring global capital into the world’s poorest areas and earn profits for the privileged. By servicing the other side of the poor’s balance sheet, microlenders would get a better sense of their customers’ creditworthiness, and make them partners in the enterprise.

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