For my non-microfinance readers, the number one debate in microfinance right now is whether or not organizations should be charging higher interest rates (or improving their operating efficiency) in order to access the capital markets, which opens the doors to huge amounts of money, but also an obligation to generate returns for your investors. Over at the Big Think, a very cool site full of interviews with thought leaders, Muhammad Yunus shares his thoughts on the commercialization of microfinance:
Commercialization is a kind of code word. In plain, simple English it means “make money” by doing that. My position has always been microcredit should be an area for social business where you want to help poor people get out of poverty by doing business. You don’t lose money. You get your money back, but you don’t make profit out of it. Because with that money you want to give to the poor people so that they get out of poverty faster. That’s where the interest is. So I look at microcredit in that direction. The other direction is this is an interesting, new, emerging area of business. If you put money . . . If you invest your money, you make a lot of money. I don’t see that is the right kind of approach, because loan sharks have been doing this for years and generations and for ages. They lend money to the poor people and make a lot of money by exploiting them. So microcredit is not a new tool for exploitation. Microcredit is a tool to help people get out of poverty. So if commercialization means you make money, I will say I’m not in support of that. I would rather discourage that thing to happen. But if you want to do in a business way . . . make some profit, I would still allow or admit up to a certain amount. And their interest rate issue comes in – how much you take back. Say my definition of reasonable interest rate is cost to fund at the market price, plus 10 percent maximum. So that should be the maximum of interest rate that you can charge, and you’ll be a proper microcredit program. If you go beyond that, I tell you you are going into a risky area where you are getting too high. And after a while if my cost to fund at market price plus 15 percent and above . . . If that is the interest rate, then I’ll say you are in the red area of lending to the poor because now you are moving into the loan shark zone. So this is the kind of ground rules that I try to promote.
I understand where Professor Yunus is coming from, but I still think the argument focuses too much on the profit motive itself, rather than what is being done with the profits generated. A microfinance institution could charge lower interest rates and make a smaller profit, which is, in turn, returned to investors in the form of dividends. Or, it could charge higher interest rates and make greater profits, but reinvest that money into the organization in order to expand operations and reach more clients. Which one is is more ethical? Which one is doing a better job of serving the poor? And which one is making a larger impact in terms of poverty alleviation? This is an idealized situation and an oversimplification that ignores the nuance, but it’s a valid question I think.
I talked more about this issue in a post from a few weeks ago.