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Banks Making Big Profits From Tiny Loans
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Anita Edward says she has borrowed money three times from LAPO, Lift Above Poverty Organization, for her hair salon,
Amazing Collections, in Benin City, Nigeria. More Photos »
By NEIL MacFARQUHAR
Published: April 13, 2010
In recent years, the idea of giving small loans to poor people became
the darling of the development world, hailed as the long elusive
formula to propel even the most destitute into better lives.
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Actors like Natalie Portman and
Michael Douglas lent their boldface
names to the cause. Muhammad
Yunus, the economist who pioneered
the practice by lending small amounts
to basket weavers in Bangladesh, won
a Nobel Peace Prize for it in 2006.
The idea even got its very own United
Nations year in 2005.
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But the phenomenon has grown so popular that some of
its biggest proponents are now wringing their hands over
the direction it has taken. 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.
“We created microcredit to fight the loan sharks; we
didn’t create microcredit to encourage new loan sharks,”
Mr. Yunus recently said at 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
http://www.nytimes.com/2010/04/14/world/14microfinance.html[2/22/2012 10:37:06 AM]
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Banks Making Big Profits From Tiny Loans - NYTimes.com
Adriana Zehbrauskas for The New York
Times
In Mexico City, Maria Vargas has
borrowed larger and larger amounts
from Compartamos, a Mexican firm,
over the past two decades to expand
her T-shirt factory to 25 sewing
machines from 5. More Photos »
way, but not as an opportunity to make money out of poor
people.”
The fracas over preserving the field’s saintly aura centers
on the question of how much interest and profit is
acceptable, and what constitutes exploitation. The noisy
interest rate fight has even attracted Congressional
scrutiny, with the House Financial Services Committee
holding hearings this year focused in part on whether some microcredit institutions are
scamming the poor.
Rates vary widely across the globe, but the ones that draw the most concern tend to
occur in countries like Nigeria and Mexico, where the demand for small loans from a
large population cannot be met by existing lenders.
Unlike virtually every Web page trumpeting the accomplishments of microcredit
institutions around the world, the page for Te Creemos, a Mexican lender, lacks even
one testimonial from a thriving customer — no beaming woman earning her first income
by growing a soap business out of her kitchen, for example. Te Creemos 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. Mexican microfinance institutions
charge such high rates simply because they can get away with it, said Emmanuelle
Javoy, the managing director of Planet Rating, an independent Paris-based firm that
evaluates microlenders.
“They could do better; they could do a lot better,” she said. “If the ones that are very big
and have the margins don’t set the pace, then the rest of the market follows.”
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Elisabeth Malkin contributed reporting from Mexico City.
This article has been revised to reflect the following correction:
Correction: April 16, 2010
A picture caption on Wednesday with an article about high interest rates and fees on
small loans to poor people misstated the annualized interest rate paid by Rosa Gonzalez
Abad, a borrower in Mexico City shown in the photograph. While analysts have
calculated that Compartamos, Ms. Abad’s lender, charged an average of nearly 82
percent in interest and fees in 2008, the most recent year available, Ms. Abad said she
was not sure that was her own annualized rate.
A version of this article appeared in print on April 14, 2010, on page
A1 of the New York edition.
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