Microfinance: Neither a lender nor a borrower be?

The Internet and globalization have helped fuel the hype surrounding microfinance.   For Africans looking to start a business in the past, credit could only be granted by banks by using the borrower’s land as collateral. For small projects, you just didn’t bother as the available funds were being channeled to governments and institutions before being granted to ordinary people.  Putting global warming aside, alleviating global poverty has been made a focus of this century not only by the likes of Bill Gates but also other ordinary Joes who now have a chance to participate. As the trend continues, two groups are emerging, one wants to make a difference and the other wants to make money.

By now you should have heard of Kiva, which is a portal that allows individuals to provide money to lenders for Microfinancing. Kiva is well organized, requests amounts of about $ 25.00 from investors but does not charge interest on its loans. The Kiva website warns lenders the money is not tax deductible since they expect to get it back. The Grammen foundation founded by Nobel laureate Muhammad Yunus in Bangladesh and FINCA ask for charitable donations. None of these sites report any problems getting participants to provide funding. That has promoted the emergence of Ebay sponsored Microplace which is charging interest on it loans as low as 3%. UNCDF lists four Ugandan banks - Coop Bank, Centenary Bank, FINCA Uganda, PRIDE Uganda as offering microcredit (pg. 1). There might be more incentive from people around the world to help if they are getting more than just moral satisfaction from the deal. The interest to lend money for free could wane in the future as Westerners get bored and find other ways of “saving the world”.

Some institutions have realized there is a gold mine of opportunity in exploiting the poor through Microcredit. Contrary to what expected, the default rates on these Micro loans are very low. Keeping that in mind, this article in Businessweek  gives you an idea of how Mexican Banks have perfected at model of lending to the poor for practically any reason. The interest rate can be as high as 90% with the borrowers meager possessions used as collateral.  The banks hire agents and bill collectors, with defaulters being publicly shamed to pay their loans. If this model is adopted by Africans, we can expect another century of domination by banks and foreign interests. To avoid following the path Mexican banks have taken, microlending for the poor in Africa should only be used to empower those willing to work hard to get out of poverty. It should not be a vehicle to provide money to buy plasma TVs (unless one is opening a Video store/hall) or anything which has no direct association with business or education.