Microfinance Must Return to its Roots in Charity

Dewi Gigengack | November/December 2012 Issue
What’s wrong with microcredit?
“The original idea to help poor people by providing a small start-up loan is a good one. But the goal has increasingly shifted away from charity, and the problem now is that the sector has become totally profit driven. Funds work with questionable partners that charge much-too-high interest rates and intimidate people into paying back their loans. Sometimes, children are forced into labor and women into prostitution. In India, several dozen women have even committed suicide because they were pressured to repay their loans.”
But doesn’t microcredit enable poor people to escape poverty?
“Studies show that the overall effect of microfinance is zero. In fact, it’s even worse: Often people have to take out new loans to pay back the old ones. Besides, not everyone is an entrepreneur. Studies show that 70 to 90 percent of the money is being used for consumption, not to start businesses.”
So do you think microfinance is a lost cause?
“I remain optimistic. There are good, ethical people in the sector who really help poor people in developing countries improve their lives. I see them, and I work with them every day. But unfortunately, they’re the exception now. Today, I only work with funds that do proper due diligence and don’t charge scandalous interest rates. But you don’t make much profit that way, and unfortunately, a lot of people find that unappealing.”
What is your advice to people who have money invested in microcredit?
“People who want to do good with their money have to be careful not to blindly trust the microcredit funds. Nice, pretty folders with pictures of smiling women in their colorful shops don’t tell the whole story. Ask for a list of investments; ask for interest rates; and let someone independent verify them. Ask how much profit they make. And if they won’t give you this information, take your money out.”
What will it take to reverse this negative trend?
“People in the sector have to acknowledge the problems. They have to be honest. We need more transparency: This is what we invest in, and this is how we treat our clients. And we need regulations. Right now, there are no international laws governing microfinance. That has to change, not only to protect the poor but also for American taxpayers, who also have the right to be protected. There’s a lot of government money in microfinance. Bankers hate regulations, and that’s the problem. Microfinance isn’t banking. Microfinance must return to its roots in charity.”
Find out more at microfinancetransparency.com.

Solution News Source

Microfinance Must Return to its Roots in Charity

Dewi Gigengack | November/December 2012 Issue
What’s wrong with microcredit?
“The original idea to help poor people by providing a small start-up loan is a good one. But the goal has increasingly shifted away from charity, and the problem now is that the sector has become totally profit driven. Funds work with questionable partners that charge much-too-high interest rates and intimidate people into paying back their loans. Sometimes, children are forced into labor and women into prostitution. In India, several dozen women have even committed suicide because they were pressured to repay their loans.”
But doesn’t microcredit enable poor people to escape poverty?
“Studies show that the overall effect of microfinance is zero. In fact, it’s even worse: Often people have to take out new loans to pay back the old ones. Besides, not everyone is an entrepreneur. Studies show that 70 to 90 percent of the money is being used for consumption, not to start businesses.”
So do you think microfinance is a lost cause?
“I remain optimistic. There are good, ethical people in the sector who really help poor people in developing countries improve their lives. I see them, and I work with them every day. But unfortunately, they’re the exception now. Today, I only work with funds that do proper due diligence and don’t charge scandalous interest rates. But you don’t make much profit that way, and unfortunately, a lot of people find that unappealing.”
What is your advice to people who have money invested in microcredit?
“People who want to do good with their money have to be careful not to blindly trust the microcredit funds. Nice, pretty folders with pictures of smiling women in their colorful shops don’t tell the whole story. Ask for a list of investments; ask for interest rates; and let someone independent verify them. Ask how much profit they make. And if they won’t give you this information, take your money out.”
What will it take to reverse this negative trend?
“People in the sector have to acknowledge the problems. They have to be honest. We need more transparency: This is what we invest in, and this is how we treat our clients. And we need regulations. Right now, there are no international laws governing microfinance. That has to change, not only to protect the poor but also for American taxpayers, who also have the right to be protected. There’s a lot of government money in microfinance. Bankers hate regulations, and that’s the problem. Microfinance isn’t banking. Microfinance must return to its roots in charity.”
Find out more at microfinancetransparency.com.

Solution News Source

SIGN UP

TO GET A Free DAILY DOSE OF OPTIMISM


We respect your privacy and take protecting it seriously. Privacy Policy