Microfinance: is 140 per cent interest reasonable on loans to the poor?
There was an excellent article in the New York Times last week which exposes the exorbitantly high rates of interest charged by microfinance institutions on loans to the poorest households.
The article highlights lots of examples where microfinance is leading to interest rates as high as 130-40 per cent – way above mainstream market rates.
I was alerted to the article by an industry insider who has become disillusioned with the way things have gone in the sector. He also suggested that I investigate further the practices of the largest Nigerian microfinance firm LAPO (Lift Above Poverty Organisation) which is mentioned in the article. The author, Neil MacFarqhar, says that LAPO charges some clients rates in excess of 100 per cent despite criticism of its practices. My insider contact says that LAPO has too many high profile investors and that the risk of failure has become too big for its backers – hence the deafening silence from key investors such as Grameen.
Most of the backers, including Grameen which provided multi-million US dollar loan guarantees to LAPO, are aware that the organisation is acting illegally (practices are explained in the article), yet nothing has been done to address this situation.
I’ll be writing about this deal in greater detail over the coming weeks and months as my insider suspects that there is a much bigger story here.
The MacFarqhar article shines a light on the way in which the sector has grown rapidly as hot money tries to find higher rates of return than the paltry rates on offer in the mainstream financial sector.
This money is going into a sector where legislation and regulation is poor at best. The market is supported by an almost religious like belief that microfinance can be used to lift millions out of poverty despite the there being such little evidence to support this.
The question I’m going to put to Grameen is: “What are you doing to prevent usurious rates of interest in organisations that you support and what will you do about LAPO’s illegal savings scheme?”
Watch this space.