The article, released last week, exposes the extremely high interest rates of some microfinance institutions. There have been a few deliberations over what this means (and even how accurate the end conclusion is), but the responses to this article, I think, miss the main question it brings up for the average armchair microfiancist: Is it ok to make money off the poor?
Before I get into that question, I will first tell a story. It takes place at a new student activities fair, where I was promoting a campus microfinance group. We had run out of candy, so no one was stopping by our table. I started calling out "Want to give loans to poor people?" to the passers-by, which didn't help the cause much. One bright young mind did wander over and I started to explain to him how microfinance worked. He put down a brochure he'd picked up and said: "I don't want to be a part of this, because I don't think we should put poor people into debt."
I thanked him for his time and moved on to the next potential customer.
While this incident may better highlight activism's general distrust of business and finance, it also raises the question begged by the Times article damning the high interests rates of microfinance institutions: Is it ethical to make profit off of poor people? And if so, how much?
My friend at the activities fair may think any amount of profit is too much, but I think most, when pressed, would disagree. In the case of microfinance, loans with interest may be more effective then no-strings-attached grants.
But there is a line. No one (I hope) wants to extort the poor. He Who Can Do No Harm, Muhammad Yunus, founder of the Grameen Bank, said in the Times article that any MFI charging a interest rate that's more that 10-15% above the cost of raising the loan is too much. Seems fair.
But when analyzed, as Give Well did, this guideline becomes arbitrary. They say that no interest rate is too high, given that the reasoning behind the rates are transparent. Assuming all information is accessible, then loanees should have no problem making the best decision on where to get their money.
Selling necessary goods and services to the poor can only increase their quality of life. If you look at poverty as a deprivation of services or products (for more on this read Development as Freedom), there really should be no limit on how much can be offered to the poor, and therefore, how much profit one can gain from the poor. If the prices aren't affordable (such as in the case of loan sharks), another MFI can just come in and undercut the price, stealing away their customer base and helping out those people who were paying too much. Ah, the beauty of capitalism.
I think my friend at the activities fair still wouldn't buy this (or any) defense of capitalism, but for you, the armchair micofinancist, do not despair over your money-making endeavors. No consumer market should be exempt from profit. And it might even inspire you to get out of your chair and into the field to grab some of that money for your own profit-making, life-saving idea.
If you are interested in going a bit further beyond finance and applying the idea of making profit off the poor to products, I would suggest reading Fortune at the Bottom of the Pyramid, which is essentially several case studies of companies that have successfully developed and sold products to the global poor that help improve their lives. (Edit: Whose author, I just learned, recently passed away.) One book I haven't read, but will when the DC Public Library gets its act together, is Africa Rising: How 900 million African consumers offer more than you think. Also, the Acumen Fund blog always has some feel-good stories on this topic.
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My question is, when people take out extraordinarily high-interest loans, do they know that that's what's going on? And do they know of alternatives that may be out there?
ReplyDeleteThink about the subprime mortgage mess in the States. Some argue that these mortgages increase housing opportunities for lower-income borrowers, which is a good thing. In a free market, people will choose the product (or in this case the loan) that fits within their budget and is best for them.
But if the person doesn't really know what he/she is getting into, how can he/she make a decision about what is best? For example, if a person thinks she is taking out a loan with a 3% interest rate but doesn't realize that rate is going to balloon to 10% later on, can she really make an informed decision about whether that loan is a good product?
The same is true for a microloan- do customers know what they're getting themselves into? If so, companies should be able to maximize their profits off of those loans. If not, high-interest microloans are just another subprime mortgage-esque scam designed to profit from ignorance. That's not what the "free market" is supposed to be about.
Adam,
ReplyDeleteYou make a good point. The assumption of "perfect information" is a pretty hefty assumption. As is in the case with sub-prime mortgages, regulation is good when suppliers fail to be up front with their interest rates and what else is out there.
I think the argument against regulation on microloans is that it might actually take a very high interest rate to maintain a MFI in certain areas. Closing out high interest rates might close out MFIs, which could still be offering lower rates than the other alternative, like loan sharks explicitly extorting the poor.
But, those MFIs could also be extorting the poor and only undercutting the loan sharks by a small amount, reaping high profits. You can't really blame them for this, as they are offering a better service, just not the best. In an ideal world, more MFIs would show up and keep undercutting until an affordable rate is set, but barriers to entry in emerging markets prevents that from happening.
So, I think the answer to these questions is: It's complicated. You will have to look at each MFI on a case by case basis. Some oversight is probably needed, (not necessarily regulation of interest rates), to ensure that Goldman Sachs-like MFIs don't start preying on the less-informed.