Making over the multi-billion microfinance industry

A number of microfinance institutions lend as much as $70bn annually to financially strapped but aspirationally rich entrepreneurs in the developing world. Organisations with links to microfinance institutions are now looking to spur similar activity in the MENA region
Around 600 microfinancing firms have loaned $12bn to 10m people

Around 600 microfinancing firms have loaned $12bn to 10m people

Thousands of rickshaw drivers cram into the city streets of Bangladesh every day. But at least one driver escaped this urban nightmare to pursue his rural dream of becoming an entrepreneur back in his home village.

He started by plunging into his savings and topping it off with an interest-free loan of less than $150. He then bought a phone recharging and tuck shop, quadrupling his monthly income from around 200 Bangladeshi takas — or less than $2.50 — to 800 takas. After he grew his savings and learned about personal financial management, he started a side-game of agricultural upgrades: he bought a goat that he later sold for a cow, after which he purchased three more cows to sell in a nearby market.

“Two months back he married off his little sister and was quite happy about it, because before he didn’t have the money to arrange the wedding,” says Armin Zaman Khan, an executive member at CommunityAction, a student-led organisation that provides poor Bangladeshis with interest-free microloans.

So go some of the successful start-up stories in the developing world, where hundreds of microfinance institutions lend as much as $70bn annually to financially strapped but aspirationally rich entrepreneurs. Around 600 organisations have loaned $12bn to more than 10 million low-income clients in Latin America and the Caribbean alone, according to the Inter-American Development Bank. In India, this sector has been valued at $5 to $7bn annually.

Now, some organisations with links to microfinance institutions are looking to spur similar activity in the Middle East and North Africa. Kiva is a non-profit that boasts a network of more than 160 microfinance partners that have helped loan $368m since 2005. “We’re hoping to expand over the next couple of years [in Mena], so Kiva can be one of the main players,” says Michael Looft, Kiva’s regional director for Europe, Asia and the Middle East.

Credit for sparking the global microcredit movement largely goes to a Bangladeshi economist and banker — Muhammad Yunus — who created Grameen Bank. In 2006, they jointly won the Nobel Peace Prize “for their efforts to create economic and social development from below.” All of a sudden, creditors from around the world started aggressively courting small-fry entrepreneurs and touting default rates of just one to two percent.

But heated growth in the industry has also ignited a financial firestorm of controversy. Some microfinance institutions have been criticised for charging high interest rates that can range from 15 to 50 percent but top 100 percent, most notably in unregulated markets. Other organisations have been attacked for aggressive collection methods that have “resulted in cases of forced prostitution, child labour, suicide, and nationwide revolts against the microfinance community,” argues a new book from Hugh Sinclair, an industry insider who wrote Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor.

“Microfinance went through the same mistakes as banks,” says Celia de Anca, director of the Saudi-Spanish Center for Islamic Economics and Finance in Madrid. “It became a business and it was fashionable, so everyone went into it. Now, there’s a lot of criticism against them.”

Even Yunus has come under fire. Last year, he was forced out of the bank he founded, reportedly because he did not comply with a certain rule when he created Grameen. Meanwhile, his country’s prime minister, Sheikh Hasina, has accused some microlenders of “sucking blood from the poor in the name of poverty alleviation.”

Lenders say they have no choice but to charge high administrative costs to reach remote areas, or because they can’t invest money from clients the same way normal banks do. “It’s really hard because every market is different,” says Looft. “In some places you see high interest rates but they’re serving a bunch of islands and their costs are so high.”

Even so, some players in this sector have responded by trying to distance their lending practices from others that have been knocked for high costs.

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