Poor Still Benefit When Microcredit Reaps Megaprofits

Tuesday, April 5, 2011

IS it right to profit from the poor? This question has sparked a civil war in the business of microcredit – making small loans to the poor in developing countries – and badly tarnished the image of what had been seen as a rare success story in the fight against global poverty. Who wins this battle about how best to deliver aid could determine whether hundreds of millions of people get the chance to escape abject poverty.

The controversy began last year when reports emerged that farmers in the Indian state of Andra Pradesh committed suicide because of the usurious rates of interest being charged by microfinance providers. In October, the state government issued an ordinance that imposed severe restrictions on microlenders in order to, it claimed, protect borrowers from “being exploited by private microfinance institutions through usurious interest rates and coercive means”.

Much of the blame fell on SKS, a microlending business that had expanded rapidly by raising money from the global capital markets. The need to make profits to satisfy these commercial investors, it was alleged, had driven up the loan rate charged to the poor, with fatal consequences.

SKS’s share price slumped 50 per cent when Andra Pradesh introduced the legislation. Things got worse this year when the man who started the microfinance revolution, Nobel Peace Prize-winner Muhammad Yunus, wrote in The New York Times not to defend but to denounce. “In the 1970s, when I began working [in Bangladesh] on what would eventually be called ’microcredit’, one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor”, he lamented, “I never imagined that one day microcredit would give rise to its own breed of loan sharks.” Ouch.

Source: The Australian (link opens in a new window)