Whether Microfinance Should Be Engaged In as a For-Profit Business

[Guest]

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[Amy-in-PHX]

Regarding whether microloans to the poor should be done as a business by for-profit entities, this is an excerpt from an opinion piece published by Mohamed Yunus on January 9, 2011, in The Daily Star, an online Bangladesh daily.  The entire piece can be found here:  http://www.thedailystar.net/newDesign/news-details.php?nid=169263.  (Grameen Bank is owned by the borrowers of Grameen, I have read -- I believe it is organized like a "co-op" here in the US, with no shareholders to satisfy.)

Commercialisation has been a terrible wrong turn for microfinance, and it indicates a worrying ''mission drift'' in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity. There are serious practical problems with treating microcredit as an ordinary profit-maximising business. Instead of creating wholesale funds dedicated to lending money to microfinance institutions, as Bangladesh has done, these commercial organisations raise larger sums in volatile international financial markets, and then transmit financial risks to the poor.

Furthermore, it means that commercial microcredit institutions are subject to demands for ever-increasing profits, which can only come in the form of higher interest rates charged to the poor, defeating the very purpose of the loans.

Some advocates of commercialisation say it's the only way to attract the money that's needed to expand the availability of microcredit and to ''liberate'' the system from dependence on foundations and other charitable donors. But it is possible to harness investment in microcredit -- and even make a profit -- without working through either charities or global financial markets.

Grameen Bank, where I am managing director, has 2,500 branches in Bangladesh. It lends out more than $100 million a month, from loans of less than $10 for beggars in our ''Struggling Members'' programme, to micro-enterprise loans of about $1,000. Most branches are financially self-reliant, dependent only on deposits from ordinary Bangladeshis. When borrowers join the bank, they open a savings account. All borrowers have savings accounts at the bank, many with balances larger than their loans. And every year, the bank's profits are returned to the borrowers -- 97 percent of them poor women --in the form of dividends. 

More microcredit institutions should adopt this model. The community needs to reaffirm the original definition of microcredit, abandon commercialisation and turn back to serving the poor.

[tomviolence]

Like most other things, there is no absolute right or wrong. If micro-finance organizations relied on donations only, they might not have any desire to be self sufficent, efficent or loan to clients who have a significant chance of paying back. There is a place between charity and usury that microfinance can exist in.

[Amy-in-PHX]

Like most other things, there is no absolute right or wrong. If micro-finance organizations relied on donations only, they might not have any desire to be self sufficent, efficent or loan to clients who have a significant chance of paying back. There is a place between charity and usury that microfinance can exist in.

I don't think Yunus contends that MFIs should rely on "donations only."  Rather, he says they should be structured like Grameen, which returns most profits to the borrower/owners.

[Visitor Number 1]

Just to present the other side of the argument, here are a couple of criticisms of the opinion piece written by Dr. Yunus.

From David Roodman at the Center for Global Development:
http://blogs.cgdev.org/open_book/2011/01/professor-yunuss-opinion.php

In particular, while it is true that Grameen members hold legal claim to 97% of the Grameen Bank’s net worth, they only contributed about $7.5 million in capital, at 100 taka ($1.40) per member. The Grameen Bank has not shown that microfinance can grow large purely through cooperative ownership.

In fact, as I wrote last summer, an irony in Yunus’s criticism of for-profit microlenders for going to the capital markets is that Grameen Bank is itself running low on capital, by which I mean risk-absorbing, profit sharing funds that banks are required to keep on hand in case of losses. And it is not clear (to me at least) how Grameen will get more. Maybe the government will step in…

From Matthew Bishop of The Economist:
http://www.philanthrocapitalism.net/2011/01/muhammad-cronus/

Even in wealthy countries, poor people are often excluded from the mainstream financial system because they are an expensive client group to serve. There is little difference in the administrative cost to a financial service provider of offering a loan for $100 or $1,000 but the interest rate required to cover those administrative costs (as well as the cost of raising the money to lend) gets lower the bigger the loan.  A $100 loan at 50% would pay the lender $50 over a year, while $1,000 lent at 10% would yield $100.)

For some microfinance providers, like Grameen, the way to keep down the interest rate is to take deposits from clients to fund loans. That is all well and good for Grameen but financial regulations in many countries stop microfinance providers taking deposits and the capital has to come from somewhere else. And, given the limited supply of the sort of philanthropic donations that helped Grameen get started, the only plentiful supply of capital is for-profit investors.