 Announcement of MF Transparency at the Microcredit Summit in Bali
In an effort to head off a potential crisis in the fast-expanding microfinance industry, its leaders are adopting global truth-in-lending standards and creating a system for comparing loan terms offered by competing lenders. To manage the effort, a new self-monitoring organization, MicroFinance Transparency, is being set up as the industry's policeman. The goal is to prevent companies from taking advantage of poor people with high interest rates and misleading credit offers.
The initiative was announced at the Microcredit Summit in Bali by Chuck Waterfield, a professor at Columbia University who spearheaded the initiative, and Nobel Peace Prize winner Professor Muhammad Yunus, who launched the microcredit revolution in Bangladesh 30 years ago with his Grameen Bank. "Microfinance emerged as a struggle against loan sharks, so we don't want to see new loan sharks created in the name of microcredit," Professor Yunus tells BusinessWeek.
If the industry doesn't curtail abuses and confusion, it faces the prospect of government crackdowns and donor funds drying up. Since Professor Yunus pioneered the idea of lending small amounts of money to poor people without demanding collateral, the phenomenon has spread worldwide. These days, thousands of organizations are making loans to tens of millions of borrowers- usually to help them set up or expand small businesses.
Reports of High Interest Rates
Today, there are basically two kinds of microlenders: nonprofit outfits like Grameen and for-profit lenders, including traditional banks that are making forays into this market.
Starting in 2007 with an exposé of lending practices in Mexico by BusinessWeek (12/13/07), a steady drumbeat of articles critical of high interest rates charged to poor people have appeared in various publications. Professor Yunus said he was alarmed by the direction the industry was taking. "I felt so bad," he says. "I made this thing and they came in and abused it. What a way to discredit a whole idea!"
Waterfield, who has been researching and writing about microcredit for decades, said he became concerned about the industry after Mexico's Banco Compartamos (BMOSF), which had once been a nonprofit organization, switched to a profit-seeking enterprise, and then went public early last year. The IPO netted a windfall for its backers and attracted Wall Street money.
There are several sticky issues here. Organizations that seek profits and rich returns for investors have to charge interest rates high enough to produce those yields. Compartamos, for instance, charges more than 100% annually on its typical loans, according to Waterfield's analysis. In addition, Waterfield says, much of the microcredit industry markets loans to poorly educated borrowers in ways that are hard to understand and tend to underplay the impact on their family finances. "Organizations that want to make a lot of money can set a very high price that doesn't look like a high price," says Waterfield.
How Microfinance Transparency Will Work
MicroFinance Transparency will collect information from all microcredit lenders and store it in a database on its Web site, mftransparency.org, that's searchable via the Web by anybody who is interested. All of the loans will be converted into annual percentage rates based on the true cost of the loans. In addition, all of the costs associated with the loan, including any additional fees charged by the lenders, will be rolled into the total. Waterfield says most microcredit organizations will submit their data, and, for those that don't, the information will be collected by gathering contracts from their borrowers and crunching the numbers. These days, most microcredit organizations market their loans using a monthly interest rate, say 2% to 4%. That may sound reasonable to people used to paying even higher rates to village loan sharks, but the lenders don't spell out to borrowers that these are flat rates-meaning they're paid on the total loan amount, even as the borrower pays down the principal during the year. Grameen Bank operates differently. It charges a 20% annual rate on a declining basis. Each week, when Grameen borrowers make their payments, the principal of their loan and the basis of future interest payments gradually declines. The APR of a Grameen loan is actually about 10% per year.
One of the dangers to the microcredit industry is that countries may put limits on the amount of interest the organizations can charge borrowers. Already, Nicaragua, Ecuador, and South Africa have set ceilings. While that may sound like a reasonable move, if rates are set at unsustainable levels it could smother some legitimate microlending activity.
Endorsement for MFTransparency
Since MFTransparency's launch in July 2008, 252 industry leaders, including MFIs and Apex Banks currently serving 80 million clients worldwide, have signed the endorser statement.
Report by Steve Hamm
http://www.businessweek.com/bwdaily/dnflash/content/jul2008/db20080728_875314.htm
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