Microfinance: Wall Street’s Next Target?

Microfinance can be extremely profitable. Think about it from a bank’s perspective: you are often lending to people with no other financial options in places where every penny counts. As a for-profit institution, you are able to charge interests rates as high as 30 or 40% and justify these rates by saying the people you are lending to are extremely high risk, have no collateral, and require the same overhead costs as lesser-value transactions. Microfinance institutions help poor people so that makes them social businesses… right?

Entrepreneurship in Ecuador can be extremely challenging. Think about it from a mother’s perspective: you live hand-to-mouth on an unstable $40 per week income, yet you must feed, clothe, and educate three children. Money is hard to keep safe in the house, but to open a bank account, you need a $200 deposit. You must gather a lump sum of money to start your small restaurant; however, the local bank requires you to have a business for six months to receive a loan. How can you get a loan you need to start a business when the loan itself requires a business?

A vast gap exists between socially lending to the poor and profitably lending to the poor. When American lenders give money to Kiva.org, they assume it is a socially responsible investment; however, many of Kiva’s partners are for-profit institutions. Microfinanza’s PRISMA in Peru even charges an average interest rate of 58%!

I do not disagree with the ability of microfinance banks to be profitable. In fact, they must be in order to survive and grow rapidly. They provide the poorest people in the world with the ability to grow and expand their businesses. However, they do this by tiptoeing along a fine line between social responsibility and extortion in monopolized financial markets.

Popular media suggests that microfinance is always socially good. In most cases it is (thank you Muhammed Yunus for setting this precedent), but in some cases it isn’t. The world’s poor provide a unique financial opportunity for exploitatively high profit loans with little regulation. (Shh – don’t tell Wall Street about microfinance– I hear they’re looking to fill the position for unregulated high-profit lending.) Therefore, those of us involved in international development must be careful about what we consider to be social financial institutions lest we allow microfinance to go the way of subprime loans.