August 1, 2008

Microfinance: The Next Subprime?

From the Financial Times:  
The world’s biggest banks risk creating a subprime-style crisis for millions of the planet’s poorest people if they continue to plough money into the booming microfinance sector, Muhammad Yunus, the Nobel laureate pioneer of microcredit, warned on Monday.

In a broadside against the increasing commercialisation of microfinance, Mr Yunus said overseas investors only served to introduce foreign exchange risks and should stay out of the sector.

“If you build it up that there’s a lot of money to make you can get a subprime kind of thing, but this time it’s the really poor people who will be in trouble,” Mr Yunus said in answer to a question from the Financial Times while speaking to reporters from a microfinance summit in Indonesia.

. . . . .

But many in the industry fear that with the introduction of the profit motive to what was once a strictly not-for-profit endeavor is driving reckless lending at exorbitant interest rates of the kind that led to the meltdown of the US subprime mortgage market.

“When you are making profits you are moving into the mentality of the loan shark,” Mr Yunus said. “We are trying to get that loan shark out.”
I'd like to see some thoughts on this from the collective mind over at Creative Capitalism.

1 comment:

Payal said...

I am in complete agreement with the views of Mr Yunus. I feel Microfinance is best left to financing from the local banks, which has been the case in India. Though equity investments by foreign 'social investors' sound very glamourous and even in India increasingly MFIs are drwan towards it, it would lead to nothing but exhorbitant interest rates and defeat the very purpose of microFinance.

Returns is the only driving force for such investors and this would reduce MFIs into 'institutionalized moneylenders'.