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THURSDAY, NOVEMBER 26, 2009
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6

Microfinance Bubble Traps Poor in Debt

Predatory lenders offer easy cash with gouging interest rates

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(Newser) – Microfinance, loaning tiny sums to the world's poor to help start small businesses, began as an anti-poverty strategy but quickly became highly profitable for private equity firms and foreign investors. In India, writes the Wall Street Journal, poor neighborhoods are being bombarded with high-interest loan opportunities, resulting in a bizarre slum-based credit bubble. "Too much money is chasing too few good candidates," said one microfinance expert.

One woman in southern India says men working on commission came to her door and offered an easy loan, although she makes just $8 a week. She took out $126 at eye-watering interest rates—not to start a business, as microfinancers intend recipients to do, but to pay overdue bills and buy food—and then another nine loans from different lenders that left her buried in debt. She wants to see the creditors kicked out of her community, "not just for now, but forever."

A potter works in Dharavi, one of the world's largest slums, in Mumbai, India, Sunday, June 17, 2007.
A potter works in Dharavi, one of the world's largest slums, in Mumbai, India, Sunday, June 17, 2007.   (AP Photo/Gautam Singh)
Muhammad Yunus, an economist from Bangladesh who founded the Grameen Bank and won a Nobel Peace Prize for microfinance.
Muhammad Yunus, an economist from Bangladesh who founded the Grameen Bank and won a Nobel Peace Prize for microfinance.   (AP Photo/Remy de la Mauviniere)
High rise buildings are seen in the foreground of Asia's largest slum Dharavi, in Mumbai, India, Tuesday, May 29, 2007.
High rise buildings are seen in the foreground of Asia's largest slum Dharavi, in Mumbai, India, Tuesday, May 29, 2007.   (AP Photo/Rajesh Nirgude)
Residents of a slum settlement in Santipur area of Gauhati, India, Wednesday, May 24, 2006.
Residents of a slum settlement in Santipur area of Gauhati, India, Wednesday, May 24, 2006.   (AP Photo/Anupam Nath)
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I understand that it is credit, that you have to pay interest, and your debt grows. But sometimes the problems we have seem like they can only be solved by taking another loan. One problem solved, another created. - Lalita Sharma, who earns $8 a week

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6 comments
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jagerhans
Aug 13, 09 9:09 AM CDT
since the corporate vultures won't be allowed to skin them for hide when they will become insolvent I wonder who is supposed to take the hot potato this time. Reply
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schmidtkoff
Aug 13, 09 9:56 AM CDT
wow. the micro financing started out to be a good idea. it worked for a while. but as usual the money vultures came in to pick the bones of those who had no flesh. shame on them. shame on them. damn greedy obnoxious and selfish pigs taking advantage of the disadvantaged. Reply
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IN RESPONSE:
Mr.C
Aug 13, 09 7:51 PM CDT
there are plenty of companies that are still in it for the good and some don't even charge any interest.
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Altoecko
Aug 13, 09 10:06 AM CDT
Oh no, this is such a good program! I think it'd work a lot more if only private individuals were allowed to participate and interest is little to nonexistent. I hope it's not to late to salvage this. Reply
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kokuaguy
Aug 13, 09 2:30 PM CDT
Won't be going to the "source" in this case since it requires a subscription to WSJ. This kind of lending should never be done with the idea of profit for the "investor." All such loans should be at low interest rates, and individuals should get involved through reputable NGOs etc. Check out Kiwa: http://www.kiva.org/about Reply
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