New York Times: Big Banks Draw Profits From Microloans to Poor

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Apr 14, 2010

Apr 14, 2010

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> Posted by Kelley Mesa
The New York Times today writes on a topic of much concern for the microfinance community—interest rates. In recent years, interest rates have been falling, but there is still quite a ways to go.
The author, Neil MacFarquhar, is right to highlight transparency as a key factor in this debate. Clear communication of loan terms with clients, public disclosure of rates—these will contribute to an open and competitive environment. Indeed, transparent pricing is at the heart of The Smart Campaign.  And so is responsible pricing, which calls for continued striving to reduce costs and increase competition so that interest rates can continue to fall.
The microfinance industry is at a crossroads. We can make the same kinds of mistakes as the mainstream American financial sector did in the subprime mortgage industry, when they promoted teaser interest rates and other ways of enticing clients to over-borrow.  Or we can choose the high road of transparency, keeping the client first in all decision-making. If we fail to progress on interest rate transparency and ultimately in reducing costs and rates, we will undoubtedly suffer serious consequences as an industry.  The Smart Campaign says let’s make microfinance an example of responsible finance for the rest of the world. 
Read the complete article here »

In recent years, the idea of giving small loans to poor people became the darling of the development world, hailed as the long elusive formula to propel even the most destitute into better lives.
Actors like Natalie Portman and Michael Douglas lend their boldface names to the cause. Muhammad Yunus, the economist who pioneered the practice by lending small amounts to basket weavers in Bangladesh, won a Nobel Peace Prize for it in 2006. The idea even got its very own United Nations year in 2005.
But the phenomenon has grown so popular that some of its biggest proponents are now wringing their hands over the direction it has taken. Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more. More »

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