Without better oversight microfinance could become exploitative
Microfinance might have been created by social justice groups and nongovernmental organizations (NGOs) to empower poor people at a local level, but there’s no longer anything local or micro about it, Kavaljit Singh writes in Third World Resurgence (April 2010). Globally, microfinance institutions (MFIs) control $50 billion in assets, making the feel-good field a tempting target for unscrupulous lenders and investors.
Corporate institutions with big-time bank and private equity funding are increasingly dominating microfinance, Singh explains. The market is attractive: Interest rates on microloans can reach more than 60 percent (intended to cover administrative costs associated with making the loans), and repayment rates hover around 95 percent, significantly higher than in commercial lending.
In India, where Singh is the director of the Public Interest Research Centre, a heated debate erupted over proper regulation of microfinance when SKS Microfinance, the country’s largest MFI, announced an initial public offering worth $250 million. There were also reports that, in advance of the IPO, top-level SKS promoters had sold part of their stake to a hedge fund, becoming “instant millionaires while their borrowers remain desperately poor,” Singh writes.
The very idea of microfinance is at a crossroads, explains economist Sanjay Sinha in Microfinance Focus (June 15, 2010). As an industry, it was a “slow-moving tortoise” in the 1990s, launched by welfare-minded NGOs with limited experience in the financial sector. In the early 21st century, as good financial practices were established, many NGOs separated microfinance services from other development activities, creating independent microfinance organizations. Spurred on by tempting IPOs, MFIs are now “an overcharged bull growing at 70 to 100 percent per annum in some markets,” Sinha writes.
Regulation presents a unique challenge, Kiva fellow Austin Harris writes on the organization’s website (July 16, 2010). There are so many kinds of institutions and different ways of doing business, “there is often no single body to regulate and supervise the operations of all MFIs.”
Without better oversight, Singh cautions, microfinance could “simply end up as an exploitative form of organized money lending.”