Tuesday, February 22, 2011

Microfinance challenged

by Anni Kasari - Volunteer, Program Manager

It's another Tuesday afternoon and we are on our way to meet our borrowers in Díaz Ordaz, an hour's drive from downtown Oaxaca. On our way we pass roadside stands selling tacos, tlayudas and other local delicacies; launderettes, petrol stations, and a small bank offering microloans. Suddenly I see another one, and another – dozens of signs advertising small loans before we even get out of the city centre.

Getting a microloan in Mexico is easy. There is all kinds of credit available: arranging a payment plan for a flatscreen television, for example, isn't a problem even if your household income is very low. What is often left unclear is the terms of the plan, though: many people from poorer backgrounds sign up without having a clear understanding of what happens if they are unable to repay. With interest rates on microloans offered by Mexican commercial banks averaging approximately 70%, even the slightest adversity faced by the borrower may lead to a situation in which they are unable to pay back.

So when did microcredit become so commercial, exploitative and ugly? At what point did people forget about Muhammad Yunus's original idea of providing small loans that poor people could use to lift themselves out of poverty? The kind of loans that are provided by commercial banks for financial profit are very far from the idea behind institutions like the Grameen Bank or Fundación En Vía. At the moment, microfinance institutions face the big challenge of maintaining their good reputation despite the ruthless efforts of some to exploit their positive image for financial profit. As Yunus recently wrote in The New York Times, ”credit programs that seek to profit from the suffering of the poor should not be described as ´microcredit,´ and investors who own such programs should not be allowed to benefit from the trust and respect that microcredit banks have rightly earned.

Greater regulation is needed, but a great responsibility also lies on the microfinance institutions to guarantee fair practices and transparency. By providing loans with 0% interest, we at En Vía are working to ensure that microfinance remains a buzzword for doing good.

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