Banks make big money from the poorest

Samuel Ighagbon watching employees at his piggery. He has defaulted several times on loans from LAPO. The overriding question facing the industry, analysts say, remains how much money investors should make from lending to poor people, mostly women, often at interest rates that are hidden. -- NYT photo

Sharks come in different sizes. 'Loan sharks' too are available in different shapes and sizes. But when the going gets tough, the smaller among the 'loan sharks' start crying foul. This is a usual phenomenon.

It is therefore amusing when Muhammad Yunus, who won a Nobel Peace prize in 2006, cries foul. The New York Times (April 14, 2010) quoted him saying: “We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,” According to NYT, Mr. Yunus was recently addressing a gathering of financial officials at the United Nations. “Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.”

Look who is talking?

The man who started Grameen Bank, which is a pioneering institution for organised money lending, and is making tonnes of money by exploiting the poor, is now howling. The problem is that bigger 'loan sharks' have taken over, and that is worrying Mr Yunus. No wonder, after the successful marketing of mobile phones in the name of the poor, he is now venturing into providing the poor with cheaper Adidas shoes. This is what is called diversification. A smart and shrewd businessman is always looking to diversifying his business.

The New York Times report "Banks Making Big Profits From Tiny Loans" only endorses what we have been saying in these columns. It is not only banks elsewhere which make money from the poor. In India too, it is in many ways the poorest of the poor who sustain the banks. So the next time you see a similing CEO of ICICI Bank Ms. Chanda D. Kochhar, you should know the reason.

I still can't overcome my anger when I recall the statement her predecessor KV Kamath had made some years back: "There is enough money to be made from rural areas." I thought Mr Yunus should have been the first one to slam Kamath for saying this. But then I forget, birds of the same feather flock together.

Let us look at some of the salient points made in the New York Times report:

-- 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.

-- Te Creemos, a Mexican lender has some of the highest interest rates and fees in the world of microfinance, analysts say, a whopping 125 percent average annual rate. The average in Mexico itself is around 70 percent, compared with a global average of about 37 percent in interest and fees, analysts say.

-- Making pots of money from microfinance is certainly not illegal. CARE, the Atlanta-based humanitarian organization, was the force behind a microfinance institution it started in Peru in 1997. The initial investment was around $3.5 million, including $450,000 of taxpayer money. But last fall, Banco de Credito, one of Peru’s largest banks, bought the business for $96 million, of which CARE pocketed $74 million.

-- Compartamos, a Mexican firm that began life as a tiny nonprofit organization, generated $458 million through a public stock sale in 2007, that investors fully recognized the potential for a windfall, experts said. Compartamos charges an average of nearly 82 percent in interest and fees.

-- You can make money from the poorest people in the world — is that a bad thing, or is that just a business?” asked Mr. Waterfield of mftransparency.org.

You can read the full report at: http://www.nytimes.com/2010/04/14/world/14microfinance.html?scp=1&sq=microcredit&st=cse