Obama’s criticism of Wall Street banks extends to microfinance sector

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Category : Development, microfinance, news

Microfinance banks and their owners are no better than Wall Street banks and their owners. So says Jonathan Lewis a microfinancier, social entrepreneur and commentator.

In an excellent article in the Huffington Post, Lewis makes the point that Barack Obama’s criticisms of the “bandits” of Wall Street (in the run up to passing stricter regulation of banking practice) are just as applicable to the profit-seeking microfinance business.

He explains why the neat solutions offered by microfinance are attractive but that the reality in many cases is predatory behaviour, exploitation of the poor and misuse of the market and funds.

“Microfinance is not a cure-all, an economic development elixir. Microfinance does not build roads, schools or clinics; it has not stopped a war or cleared a mine field, nor does it preserve pristine rivers, protect endangered species or restore cultural treasures.

The public brand of microfinance is impoverished micro-entrepreneurs, mostly women, valiantly raising families while operating tiny businesses. For a nation [US] whose self-image extols the self-made man, the maverick Western sheriff and the college drop-out who becomes the richest man in the world, the narrative is seductive. It converts the self-employed poor, victimized by the formal economy, into an icon of economic opportunity.”

One interesting by-product of all the recent criticism is position taken by Muhammud Yunus of Grameen Bank who is quoted in this article. He is trying to distance himself from this criticism by balling out other banks as excessive profit takers. But he has failed to respond to criticism of his own organisation and the overblown claims of microfinance that he continues to peddle.

As I have recorded, there are increasing critiques, exposes and research papers which seriously question the claims of microfinance, its supporters and banks. It will be interesting to see how Yunus positions himself as what Lewis calls the, “whiff of hypocrisy and the odor of malfeasance” in the sector becomes a huge stink.

Microfinance: is 140 per cent interest reasonable on loans to the poor?

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Category : microfinance, news

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.

Venture capitalists fear microfinance is the next sub-prime

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Category : microfinance, news

It’s not often that I’ve heard venture capitalists (VC) and private equity (PE) firms warn that markets might be overpriced and in danger of bursting. So it is with huge interest that I read of such warnings within the microfinance sector in The Times of India.

A survey of 50 VC and PE firms in India found that three-quarters of the respondents fear the sector is getting ‘‘overhyped to a bubble-like proportion’’. It says that microfinance is one of the most attractive financial sectors in India but cautions that there is too much money chasing firms in the sector. The research also says that there is a danger that borrowers are simply taking out new loans to pay off old ones.

One PE manager says that there is a real sub-prime situation in microfinance with asset inflation and over valuations. He adds that the 40 per cent expected returns are not realistic and that a good concept will turn ugly.

This sounds really familiar. Let me think . . . when did we last have an asset bubble where too much money was chasing too many bad borrowers while agents profited from fees? Ah yes, that’ll be the sub-prime crisis from 2007 when the world economy was brought to its knees – hard to forget that really. It’s only a matter of time before the microfinance bubble bursts.

Not that there is a shortage of cash going into the sector – not while there are millions to be made. The Economic Times of India reports that SKS Microfinance chairman Vikram Akula has part sold his stake in the company making a 12-fold profit before the bank’s initial public offer (IPO). Other senior bank staff have also sold shares to realise handsome profits which are thousands of times greater than the microfinance loans offered.

The bank’s IPO is highly contentious. By floating the bank, management will be accountable to profit seeking shareholders rather than making sure that the poorest households are no longer financially excluded. The theory behind microfinance being a tool for poverty reduction has its flaws but the dangers of the poorest being exposed to private credit and shareholders is even scarier to say the least.

There’s very little mention of poverty reduction in many microfinance stories these days and is perhaps a reflection of the real concerns of the sector.