Thursday, December 20, 2007

Microloans, Macro-interest


Image from Predatory Lending Association

I thought Business Week's article "The Ugly Side of Microlending" had a familiar ring to it:

The transactions are so minuscule they hardly seem worth the bother.
The average loan amounts to $257. But for Banco Azteca, a swiftly
growing bank affiliated with Latin America's largest household
retailer, the small sums represent a torrent of revenue that has caught
even its founders by surprise. For three decades, micro-lending was
seen as a tool of nonprofit economic development. Now poor people are
turning into one of the world's least likely sources of untapped
profit, primarily because they will pay interest rates most Americans
would consider outrageous, if not usurious.

The interest rates quoted in the article - 50%-120% - are quite outrageous to this American, but they're definitely not unheard of. What I'm speaking about, of course, is the ubiquitous payday loan, which can charge interest rates of 500% per year. (Check out the satirical Predatory Lending Association for more alarming statistics, not to mention disturbingly spot-on parody.)

These shady business practices are nothing new, but they sure sound a lot nicer when spoken of alongside Nobe Peace Prize-winning programs that extend small loans to businesspeople in the developing world who don't have the collateral for traditional bank loans. It's an association that most may not make with the payday loan model, though they are essentially the same thing. So it's not surprising to learn that Mexican non-profit microlending institutions have transitioned into the for-profit world, and quite comfortably.

Banco Compartamos portrays itself as the gentler lender to Mexico's poor. Compartamos means "let's share," reflecting the philosophy of its founder, José Ignacio Avalos Hernández. The scion of a cosmetics business family, Avalos, 48, is a devout Catholic who in 1990 converted a nonprofit donating food and clothing to the deprived into one that made loans guaranteed by borrowers' neighbors.


In 2000, Compartamos sought greater scale by becoming a for-profit, which led to the founding of the bank in 2006. Today it has a portfolio of $316 million lent to 765,000 clients, dwarfing nonprofit micro-finance organizations in Latin America. Fueled by annual interest rates that can exceed 100%, it is one of Mexico's most financially successful banks, providing investors with an average annual return on equity of 53% over the past seven years.

And so a shady business trades on its former saintly image, and the working poor are again saddled with higher costs for the same financial services that middle-class and upper-class consumers use.

For more information on these and other predatory lending practices, see the Center for Responsible Lending. If you haven't finished your holiday giving, consider donating to (or donating in the name of a gift-recipient) Kiva, a non-profit organization that collects small donations ($25, $50, $75) through the internet and directs them to microlending institutions throughout the devloping world.

Cross-posted on Cogitamus.
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