I was very excited to see the article in The New York Times questioning the business practices and transparency of some of the organizations making loans to very poor people around the world. There are clearly abuses going on, and much greater scrutiny needs to be applied to everyone who is applying the increasingly popular “microfinance” label to their activities.
To my mind, only organizations that place the mission of helping borrowers improve their economic circumstances above profits should be considered microfinance practitioners. Earning a reasonable profit by making microloans, when circumstances permit, is fine and good. But if those profits are linked to deception about the true cost of credit to the borrower, or very high pressure sales tactics, or if loans are made too easily without regard to an individual’s ability to grow their business, it’s a good bet the talk of “mission” is just window dressing.
At Opportunity Fund, we charge our microloan borrowers 8% interest, which does not cover the full cost of delivering the loans and the business coaching we provide to our clients. We have chosen to seek out additional dollars from donors, foundations, and government programs, to enable us to charge our borrowers the same rates that larger businesses pay for credit. Because these dollars are by no means unlimited, this model is not as scalable as one in which the borrower pays the full cost of the loan via interest and fees. It is a tradeoff, and each institution needs to find its own way based on the circumstances on the ground where they are working.
It’s also important to note that credit alone is no magic bullet. Fifteen years of nonprofit lending have taught us that not everyone is a natural entrepreneur; however, financial education and tools for savings do benefit everyone—and need to be part of a comprehensive package for uplifting low-income communities.
Kiva’s popular portal has created unprecedented opportunities to connect regular people both here in the U.S. and throughout the world. As for Kiva’s connection to the MFI’s it works with, I can only speak to our experience as a Kiva field partner. Kiva put us through extraordinarily detailed scrutiny before beginning to work with us, and I am confident they would not knowingly partner with an organization that did not place mission first and foremost.
At the Microfinance USA conference on May 20th and 21st in San Francisco, we’ll have a panel discussion on the debate around fair interest rate practices in microfinance, asking “What’s a Fair Price to Pay for Good Credit?”. I would encourage anyone interested in the topic to come and join in the discussion!