Microfinance in the News

April 26, 2010 § Leave a comment

If you are an avid reader of The New York Times or have a serious interest in the subject of microfinance, the media discussion of the topic over the past couple of weeks has no doubt caught your attention.  As usual, there are two sides to the story.

It all started with a New York Times article, “Banks Making Big Profits From Tiny Loans,” in which international microfinance institutions were called out for charging customers exorbitant interest rates, particularly organizations in Mexico and Nigeria, and it was suggested that Kiva had misrepresented the average rates on their site.

Not surprisingly, it was not long before the industry responded to the perceived criticism.   Opportunity Fund CEO Eric Weaver had this to say:

I was very excited to see the article in The New York Times questioning the business practices and transparency of some of the organizations making loans to very poor people around the world.  There are clearly abuses going on, and much greater scrutiny needs to be applied to everyone who is applying the increasingly popular “microfinance” label to their activities.  Read the rest of the post here…

Both ACCION USA and Kiva issued responses as well.  ACCION focused on their U.S. operations, indicating that their network has “distributed over $260 million in loans to micro-businesses across the US. We have done so with interest rates that reflect our primary mission: to put reasonably priced credit in the hands of those who are locked out of the traditional financial mainstream, and to do so in a manner that assists the business owner in increasing, not depleting his/her assets.”  Kiva addressed concerns regarding transparency and reported interest rates.

It is important to understand that, like Kiva, approximately 80% of our Field Partners are not for profit organizations. The other 20% are for-profit institutions with a strong social mission.

Despite the higher interest rates that our Field Partners charge overseas, as a whole they are barely breaking even. For Kiva’s entire portfolio, our latest data shows that the Return On Assets (ROA) across all of our Partners is approximately 0%.

This confirms our understanding that most of the interest and fees charged to borrowers are going to support the cost of supporting the lending itself.

And,

To make sure we have the most accurate data, we use audited sources for data on Kiva’s Field Partners.

Interest rates in developing countries do tend to be higher than those in the United States for the reasons stated above.  That does not mean that there is not work to be done beyond justifying the higher rates in these countries, as Elisabeth Rhyne, Director, Center for Financial Inclusion, points out in her piece on The Huffington Post. She is an advocate of the six Client Protection Principles put forth by the Smart Campaign, where she is a member of the steering committee.  One of the objectives of the principles is to increase transparency when it comes to pricing and another is to prevent borrowers from taking on more debt than they can manage.  Ms. Rhyne will participate in a panel debating interest rates at the upcoming MicrofinanceUSA 2010 conference, May 20-21 in San Francsico.

The last bit of media coverage I’ll put forth is from The Daily Beast.  Reeta Roy, president and CEO of The MasterCard Foundation, penned an article, “The Right Way to Help Haiti Now,” in which she too addresses the reporting in the Times article, and then proceeds to present a convincing argument for the benefits of microfinance, especially for the poorest of the poor, especially in a place like Haiti, which is struggling to create a sustainable recovery after the devastating earthquake.  Read it.

The message from all of the above?  The New York Times did its job, drawing attention to a worthy subject, and to some of the issues and challenges facing the microfinance movement.  But… maybe we shouldn’t jump to conclusions.  Maybe we should pause before throwing the proverbial baby out with the bathwater.

Microfinance, both domestically and internationally, is creating positive outcomes.  Is it perfect?  No.  But what is?

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