Microfinance industry becoming troubled by scandals

Muhammad Yunus

The microfinance industry, which came to prominence through its pioneer Muhammad Yunus (pictured) of Grameen Bank, is being rocked by scandals and poor economic performance. Image from Wikimedia Commons.

The microfinance industry and the microloan came out of the last several decades as a novel way to empower low-income people by extending them credit. Microlenders have been showered with praise and even Nobel prizes. However, some modern microfinance firms don’t appear to be following in the ethical or economic footsteps of the ones that came before.

Microlending firms founder

Microlending firms in Asia have experienced turbulence recently, leading some to question what the future of microcredit holds in that region. SKS Microfinance, according to the New York Times, has lost about 70 percent of its stock value on the market since its initial public offering in August of 2010. In the last quarter of 2010, the company posted a loss of more than $15 million after posting a profit of more than $14 million in the first quarter. The Indian government has been legislatively cracking down on SKS and other microcredit firms after numerous accusations of strong arm loan collections have become rampant. Last year the Economic Times reported that about 30 people in the state of Andhra Pradesh committed suicide in a 45-day period, allegedly because of debt to microcredit lenders.

Governments square off

The governments of Bangladesh and India have both pushed back against microlenders that they say crossed the line. The central bank of India passed legislation capping interest rates on microloans to 26 percent and loan amounts to 50,000 rupees or about $1,120. Furthermore, state politicians in Andhra Pradesh encouraged people to stop paying their debts to microloan lenders, and loan repayments there fell to about 10 percent, according to Forbes. In Bangladesh, Muhammad Yunus was forced from his position as head of Grameen Bank, the institution he founded, which has lent out billions in microloans to impoverished people around the world. Yunus won the Nobel Prize in Economics for his work. Lenders are accused of forcing people into a vicious cycle of debt and some are accused of using illegal or immoral methods to get borrowers to pay their debts. Yunus has been openly critical of for-profit lenders; he contends that the motive to make money rather than to help people get out of poverty is crippling microcredit as an economic tool.

The end may not be in sight

Microcredit lenders may be struggling because of economic and political conditions, but the model is beginning to take off in other countries. The Kiva organization uses donations from private individuals to raise capital for microloans all over the world. There are also American versions of microfinancing opening up. For instance, the Samuel Adams brewing company launched a joint venture with the non-profit foundation ACCION USA. Entrepreneurs can get small l0ans of a few thousand dollars to start the food-related business of their dreams, according to USA Today,. The Small Business Administration has loan programs for startups.

Sources

New York Times

Forbes

USA Today

Economic Times

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