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

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

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.

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