RC Passage-17

Passage: Giving loans to impoverished women to make ceramics or to farmers to buy milk cows were not seen as great business. Microfinance was an industry championed by antipoverty activists. Today it is on the verge of a revolution, with billions of dollars from big banks, private – equity shops and pension funds pouring in, driving growth of 30% to 40% this year alone. In 1998, a non-profit microfinance organization in Peru, converted into bank (called Mibanco). This demonstrated that the poor are good risks who repay loans on time and getting them together, not only chips away at poverty but also turns a profit. The success of Mibanco has piqued the interest of commercial banks, which had previously shunned the country’s poor. Now big banks are going after Mibanco’s clients with low-rate loans and realizing it takes special know – how to work with the unbanked – are hiring away Mibanco’s staff. But with the emergence of players who are only out for profit, microfinance schemes could end up milking the poor. This could happen in countries where lenders don’t have to disclose interest rates. When a Mexican micro financier went public, revealing its loans had rates of about 86% annually; the Consultative Group to Assist the Poor (CGAP) criticized it for putting shareholders ahead of clients. The pressure of turn a profit also forces micro financiers to change their business models in ways that depart from the industry’s core mission: to help poor people lead better lives. Such shifts have caused the average loan size to triple. More over smaller loans being costlier to service, a lower percentage of loans go to women because they tend to take out smaller sums. According to CGAP, with the flood of new large entities there is the risk that a large percentage of cross-border funds go to Latin America and eastern Europe, the world’s most developed microfinance markets. “The poorest of the world’s poor, who are predominantly in Asia and Africa get left out,” says the CEO of the nonprofit Grameen Foundation, which helps develop microfinance institutions. Segmenting the industry, might be worthwhile if it allows more of the poor to get access to credit. Multinational corporations could take the top’ microfinance institutions to the next level, and the remainder could be the responsibility of development groups and regional banks. Yet making loans to poor people is hardly a poverty cure. Property rights and the rule of law matter too. One cannot over idealize what microfinance alone can do. Most nonprofits started with lending simply because local laws prohibited nonbanks from offering deposit accounts. With an increase in competition and marketing efforts, poverty – alleviation experts are concerned that people will be talked into loans they wouldn’t otherwise want, For example, organisations like Mibanco are providing consumer loans. There is nothing wrong with buying” TV’s and microwaves on credit, but certain markets, like Mexico, have been flooded with loans that have nothing to do with providing capital to aspiring entrepreneurs just increasing household debt.