Realities of Microfinance

I recently read an eye-opening book on microfinance, ‘Confessions of a Microfinance Heretic’ by Hugh Sinclair. To say that microfinance is a sham would be an understatement.  It is quite the Ponzi scheme. It is a front for a few chosen Microfinance institutes (MFIs) and Microfinance Fund executives to leverage the desperation and naiveté of the poor to their advantage. 

The Microfinance industry is $70 billion. At 50% interest rates, which is one of the most conservative estimates, it is $35 billion in the form of interest payments, which gets charged from the poor and transferred into the coffers of the microfinance executives and fund administrators.

This does not include upfront collateral or forced savings that a majority of the MFIs insist upon.  Because this industry operates in the gray shadows of more regulated finance, no one really calls out this illegality and even if a few rating reports mention this fact, it is never a deterrent for the Microfinance funds, which very much salivate at the prospect of profits and ignore this red flag.

Microfinance was built for the purposes of loaning money to encourage enterprise in the lowest strata of society. 90%-95% of these loans are consumption based loans, which do not further any enterprise. Again, Microfinance funds blatantly ignore this ground reality.

We know from experience that if left unregulated, the noblest of ideas in finance will morph into a monster that devours all sense of sanity and decency. In this case, the evidence is quite clear. Microfinance did not help anyone except the executives who ran these MFIs and the funds who invested in these MFIs. The poor who availed of these loans only became poorer.

With more than a few sordid tales of suicides, forced slavery, prostitution, and outright revolts coming to light, one would hope that microfinance for all of its promise and its own Nobel prize will adopt a more realistic business model and truly serve the poorest instead of outright taking advantage of them. Here is another wake up call for the governments and regulators.

In the wake of quite a few MFI IPOs, it would be intellectual and moral laziness, if we did not care about the metrics and business models of these MFIs. My next post will cover these business models and performance metrics to help us separate wheat from the chaff.