@trusmis - You might find this interesting, from pp. 68-70 of Yunus' book:
"Over the years, as more and more organizations have gotten involved in microcredit, some have found it convenient to ignore the original meaning of the term. Microcredit is supposed to describe loans offered with no collateral to support income-generating businesses aimed at lifting the poor out of poverty. Yet today there are many organizations that call themselves "microcredit" programs that offer loans to people who are not poor, that require regular collateral, and that are used primarily for consumption rather than income generation. There are even "microcredit" programs that generate enormous profits for investors by charging interest at rates as high as 100 percent or even higher!
Under the circumstances, we really don't know what we are talking about when we talk about microcredit. I think it is time we classify microcredit programs according to clear, consistent categories. Here are the categories I would propose:
TYPE 1: POVERTY-FOCUSED MICROCREDIT PROGRAMS
These are poverty-focused, collateral-free, low-interest microcredit programs. Grameen Bank was created to provide this type of microcredit. Type 1 programs charge interest rates that fit into one of two zones: the Green Zone, which equals the cost of funds at the market rate plus up to 10 percent, and the Yellow Zone, which equals the cost of funds at the market rate plus 10 to 15 percent.
TYPE 2: PROFIT-MAXIMIZING MICROCREDIT PROGRAMS
These are programs that charge an interest rate higher than the Yellow Zone. They operate in the Red Zone, which is moneylenders' territory. Because of the high interest they charge, these programs cannot be viewed as poverty-focused but rather are commercial enterprises whose main objective appears to be earning large profits for shareholders or other investors.
This classification may be adjusted for special situations, such as when high salary costs make operating expenses unusually heavy. And these principles will not apply where the microcredit organization is owned by the borrowers.
However, I think the secretariat for the Microcredit Summit Campaign, which maintains a database of all microcredit programs, should classify programs according to a system like the one I propose. What's more, I believe that the Microcredit Summit Campaign should include only Type 1 programs, since only these contribute to the campaign's goal of using microcredit to help eliminate global poverty. I would like to see all the poor people of the world being reached by microcredit programs delivered through social businesses, while profit-maximizing (Type 2) programs should focus their operations on people belonging to the lower middle class and above.
There are those who contend that profit-maximizing microcredit programs are actually beneficial to the poor and to the world economy in general. They argue that charging higher rates of interest enables a microfinance institution (MFI) to become sustainable more quickly. They also claim that high rates of profit make MFIs attractive to capital market investors from the richest countries, allowing the MFIs to expand their services to the poor. Finally, they say that high interest rates enable bigger loans to create larger enterprises, which, in turn, can employ larger numbers of poor people.
The business model behind these arguments is a familiar one from the world of conventional finance, and I have no problem with it—so long as the customers are middle-class or wealthy people. But I have serious problems when people try to justify high interest rates (30 percent real interest and above) and even very high interest rates (over 70 percent) on loans given to the poor. I say, "Make all the profit you want from your middle-class customers! Feel free to take advantage of your financial position, if you can! But don't apply the same thinking to the poor. If you lend to the poor, do it without concern for profit, so that they can have the maximum help in climbing out of poverty. Once they've completed the climb, then treat them like every other customer—but not till then."
Microcredit was created to protect the people from moneylenders, not to create more moneylenders.
Like most of my fellow microcredit practitioners, I believe that there is room for many varying models of microcredit, and that experimentation across a wide range of options is likely to produce the greatest progress and the most valuable insights into what does and doesn't work. I've learned a lot from my meetings and discussions with other microcredit practitioners, and I think we can find many areas of common ground for cooperation, collaboration, and mutual support, provided we share a common goal—helping the poor get out poverty through their own efforts. "
Last edited by nest0r (2010 April 23, 9:38 pm)
