Thursday, August 21, 2008

Nobel winner says don't profit from poor

from the International Herald Tribune

The Grameen Bank is owned by the people who borrow from it. At a Microcredit summit, 11 groups have agreed to report their annual interest rates. A move that may help to keep with sectors charitable roots. - Kale

"If you are making profits you are moving into the same mental mind-set as loan sharks," Nobel Peace Prize winner Muhammad Yunus said by phone from Bali, Indonesia, where he is attending the 11th annual Microcredit Summit Campaign conference, which opened Monday.

When Yunus began making US$27 loans to women in Bangladesh three decades ago, he hoped to rescue the poor from usury. The new language of microfinance, which turns on words like "return on equity," today weighs heavily on his mind.

He believes interest rates should be set to cover costs, not maximize profits.

"Microcredit is about helping poor people get out of poverty," said Yunus, whose pioneering bank, Grameen, has already signed on to the new MicroFinance Transparency initiative.

The rush of new entrants into the microcredit market has created a welter of offerings, but lack of standardized reporting makes it hard for borrowers to figure out how to get the best deal.

"Clients are at a significant disadvantage," said MicroFinance Transparency founder Charles Waterfield.

He aims to bring truth-in-lending standards to the developing world, by publishing standardized annual interest rates on the Internet. The data from lending institutions will be self-reported.

The initiative, a U.S. nonprofit, is still cementing funding and plans to start publishing country-specific data on its Web site in October.

The push for disclosure comes at a time of intense debate within the field, which pits privatization advocates against those who believe you can save the world or make a buck — but not do both at the same time.

Members of the pro-market faction argue that civic-mindedness alone will never draw enough capital to serve the billion people who want rudimentary banking services. Profitability is the key to sustainability, they say.

Those against commercialization fear the microcredit movement is losing its soul, prioritizing investors over the world's farmers, sheepherders and street vendors, many of whom struggle by on less than a dollar a day.

Microfinance, for profit or not, is booming. According to Deutsche Bank, the volume of microfinance loans hit US$25 billion in 2007, up from US$4 billion in 2001, and another US$250 billion is still needed. The bank expects that private investors will pour US$20 billion into microfinance institutions in 2015 — 10 times more than they did in 2006.

Many groups that started as nonprofits have become for-profit, and a plethora of microfinance investment funds, targeted at institutions and individuals, have opened in the last few years.

Citigroup, Credit Suisse, Deutsche Bank, and Morgan Stanley have all entered the microfinance market, either providing direct funding, backing investment funds or securitizing debt, and private equity investors have also started to pile in, according to the World Bank's CGAP, a microfinance research group.

"You are seeing more and more financially driven investors going into this market," Eric Savage, managing director of Unitus Capital, a new for-profit firm that will help microfinance groups raise capital, said by phone from Bangalore, India.

Savage said the subprime crisis may give microfinance a further boost as investors seek diversification, and that tightening credit has so far had a "quite muted" effect on loans to microfinance institutions.

"The microfinance sector has been relatively isolated from the global credit crisis," he said.

He agreed that transparency is key, both to attract capital and give borrowers a fair shake.

The public offering of Mexico's Banco Compartamos, SA., in April 2007, was a watershed event. The bank raised US$474.7 million — and the hackles of the field's civic-minded pioneers, who say the bank is making indecent profits by charging too much interest.

In an 11-page "Letter to Our Peers" published in June, Compartamos founders Carlos Danel and Carlos Labarthe defended above-average profits as necessary to attract investors to the still-nascent field. Competition, they wrote, is already helping the poor: In the past 7 years, Compartamos' interest rates have dropped from 115 percent to 79 percent, which they say is in line with the competition.

The combination of high costs and small loan size in Mexico means interest rates are higher than in many other countries, they said.

Globally, microfinance institutions charged an average of 28 percent a year in 2006, according to CGAP.

Still, many remain galled by what Yunus, who won the 2006 Nobel Peace Prize, calls the "distortion" of the field he forged.

Link to full article. May expire in future.

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