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Yunus’ answer to the microfinance crisis…simplistic or forward looking?

January 24, 2011 Leave a comment

After emerging relatively unscathed in the personal storm that hit him a few weeks ago, concerning accusations of misuse of funds: Yunus has come out with what he believes are the answers to the current crisis affecting microfinance in India. Yunus believes that the only way to separate true microfinance institutions from those that are only just loan sharks out to profiteer from the poor is to universally cap interest rates and prevent institutions from charging anything more than 15%.

Whilst Yunus’ is approaching this in his truly saint like manner, one has to ask the question how practical this is keeping in mind that each country has a base rate that most institutions try to tag their spread to and also the fact that they need to cover their high operational costs which are widely accepted to be signficantly higher than those of mainstream commercial banks that do not necessarily cater to the unbanked majority. If you take East Africa for example, the Central Bank base rate is 6% although ALL banks will lend at twice this rate. whilst in Mexico (Compartamos are one of the institutions that Yunus has selected as being purely loan sharks) the Central bank base rate is 4.5%. In Bangladesh, Yunnus’ back yard, the Central bank base rate is 8%, banks will also lend at twice these rates or more.  If one takes these rates and adds a small margin on top to cover operational costs, its becomes difficult to accept the universal interest rate capping argument at 15%.  On top of this, a large number of microfinance institutions are no deposit-taking which means that they have to borrow capital from mainstream banks to lend to borrowers. These banks will charge rates above the base rate, add their costs of operation on top of this and then one comes to understand that as much as we in the industry don’t support overcharging clients and having opaque interest rates, one has to approach this issue with more caution.

Perhaps the solution is that microfinance institutions need to vary their interest rates based on risk and the availability of collateral from the borrower. Another way could be that more microfinance institutions should be joining platforms such as myAzimia.org, KIVA or Babyloan to obtain alternative sources of cheaper capital from social investors which in turn means that they will not charge high interest rates to  their clients as they would have obtained capital much cheaper (in Kiva’s case at 0%). There are definitely more than one ways to skin a cat, but one of them is not to universally cap rates, this in my view is too simplistic and not forward-looking.

Categories: Uncategorized

a saint or a sinner? Yunus in the firing line

January 11, 2011 Leave a comment

Recent reports that Nobel Prize winner Yunus’ Grameen Bank could have misused funds granted to it by the Norwegian government have resurfaced within the last couple of weeks. The allegations are that $96Million in funds were diverted from the Grameen legal entity to which they had been granted in the first  place and these funds were not subsequently utilised for the purpose for which they were intended. Grameen has issued a strong statement confirming that the transfers were made but the main reason behind these transfers was the utilisation of a tax loophole. On hearing  the word ‘tax loophole’,  the Bangladeshi government has jumped into the fray and stated categorically that Grameen should be paying its dues and it doesn’t care whether  has a nobel prize or not!!  Some quarters have commented that the Bangladeshi government doesnt like the near Hollywood -like cult figure that  Yunus’ cuts in Bangladesh which Yunus is, he is a  true darling of the Western world and that seems to run teh Bangladeshi’s up the wrong way!

It is not unusual for leaders with an almost saint-like status to go through periods of  sustained personal attacks(eg Jesus  Christ, Mother Teresa, Barrack Obama etc etc) But this particular attack brings to light an interesting aspect from the microfinance perspective and shows just how much Grameen has received in donor funding for its programs. The grant in question was just from one donor and it totalled almost 100million dollars, how much else does Grameen get? Is this clearly reflected in the poor that it serves in Bangladesh? are donors asking for accountability in terms of the impact of their dollars? Is there a clear correlation between dollars spent and the increase in the quality of live in some of the poor countries that Grameen serves? All interesting questions that don’t question the character of the Grameen founder but raise awareness of the need to measure the impact of microfinance in poor communities of the world.

my one and only new years resolution: lend to my friends!!!

January 4, 2011 Leave a comment

I personally stopped believing in new years resolution at the age of about 12! I realised that it was just a way to make starting the year even harder and more unpleasant.. but having said that, one thing that I think should feature in new years resolutions should you decide to have any this year are:..’.I will join the online lending revolution at a website near me!’ Crowdfunding and peer-to-peer lending have had huge growth in 2010 with higher levels of lending and borrowing expected for 2011…if you have a business you’d like to start and need capital go to Kickstarter.com and see your funding dream come true without losing any of the equity in your business..Or if you an investor tired of getting lacklustre returns from your savings account or brokerage account, check out the crowdfunding sites and see what kind of improved return you can get . If you have strong philanthropic intentions but don’t know how to fulfill them, go to an online P2P lending portal (kiva, babyloan, myC4) and select a small business to fund and feel good about it! Whatever it is you decide to do, let 2011 be your crowdfunding year, a year when you recognise how unimportant the banks and venture capital institutions will eventually become and the power of social networks in helping build up small business…happy new year to you!!!