Need to draw a line between microfinance and loan sharking: Prof Yunus
By Vikash Kumar,
Microfinance Focus, April 15, 2010 : Dr. Muhammad Yunus, microfinance pioneer and Nobel laureate shares his views on the recent developments in microfinance and discuss some of the critical issues in an exclusive interview with Microfinance Focus`s Editor in Chief Vikash Kumar on the sidelines of regional microcredit summit organized at KICC (Nairobi).
Here are excerpts:
Microfinance Focus : You have always perceived microfinance as the solution to the problem of poverty and world over microfinance institutions followed your footstep in search of this solution. How satisfied are you with the performance of this sector so far?
Prof. Yunus: If you have talent but you couldn’t use it because you don’t have the money, so microcredit will help you so that’s very important. So far the idea has spread all over the world, so that’s very happy news. But at the same time there are many organizations and initiatives which have misused the word microcredit or even abused it. The reason we created microcredit, our intention was to provide self employment and get out of poverty with it but now many organizations are coming up who take this as an opportunity to make money for themselves rather than worrying about what happens to the poor people so that goes into the same mentality as the loan sharks. We created this to fight the loan sharks, so that the loan sharks are eliminated, in the process some of these organizations are becoming loan sharks themselves. So this is the sad part of it which we are trying to sort out and let people know that we shouldn’t do that. So that way there is good news and at the same time these are the bad news.
And then I am promoting a concept of social business. Business to help people solve their problems and I could say that microcredit is an excellent opportunity for social business, where you do his business not to make money for yourself but you do it to help people get out of poverty. But some people see this as a business opportunity meaning that an opportunity to make income and profit for themselves so that’s kind of derailing from the purpose. Not just microcredit but many other social business can be created, like I mentioned people need other things like healthcare, training, information technology, human rights. All these things can be created as a separate social business. So now we can go to other frontiers and other levels, so microcredit will be one of those many things
Microfinance Focus: You have mentioned that there are few organizations that are not doing the real microfinance business. Do you have some names?
Prof. Yunus: One I have identified and talked about it. Others I have mentioned some things but they have not done it because I have tried to give them the signal rather than publically insult them. Compartamos of Mexico is one. We are very strongly against it.
Microfinance Focus: With great levels of expansion in the microfinance sector what urgent issues you think will emerge and need to be addressed?
Prof. Yunus: One is regulatory issues, in the banking regulatory sense and also in the conceptual regulatory sense like you do not create a microfinance institution where you want to make money for yourself. Banking regulation will not come into this as they are not interested in the social issue. They are interested in whether you are deceiving somebody and things like that. So the conceptual regulation has to come from the industry itself, that we should tell that this is not the genuine microfinance organization; they are abusing the word microfinance to make money for themselves. Like I have suggested some rules, in that I said that the true microfinance institution should remain within a limit like the cost of fund plus ten percent. Within that it would be a true microfinance. Cost of fund plus fifteen percent is still tolerable limits of microfinance; you are in the yellow zone. But if the cost of funds plus fifteen percent and above then you are in the red zone of microfinance meaning that you are no longer a microfinance institution but you are a loan shark organization. So this is the regulation that we make ourselves, that we define who is a genuine microfinance and who is stepping out to the loan shark territory.
Microfinance Focus: There is a recent report by CGAP which indicated that because of rapid growth and expansion of MFIs, in countries like Pakistan, Bosnia and Herzegovina, and in India also, it has created a lot of problems like multiple borrowing, over in-debtness. How do you see this kind of development?
Prof. Yunus: The sector has to resolve all this. If there is a multiple lending to the same person, the person will be unable to pay everybody so it can survive for a while and the other organizations who are not getting the money back have to be careful and they have to collaborate with each other. Those who are feeling that we are in trouble because they are borrowing and not paying back, they have to negotiate with each other and exchange information with each other so that the overlapping problem, the multiple lending problem can be reduced. So this is within the lenders capacity to resolve the problem. I think it shouldn’t be difficult. Initially it creates problem but over the time it can be solved.
Microfinance Focus: Do you think pressures from investors to grow rapidly?
Prof. Yunus: The moment you call them investors, these are the people who want to make money. I am not considering them as microfinance. So I don’t want to talk about them. I want to talk about people who want to help the poor. Investors want to make quick money so that before the industry collapse they are able to make money out of it. We are not in support of that. We are opposed to that.
Microfinance Focus: In the pursuit of becoming self sufficient, MFIs are opting for newer ways of raising funds and are often being criticized of becoming profit-oriented. Do you see this hampering the purpose of microfinance?
Prof. Yunus: We need to draw a line. This is a loan shark territory, we are opposed to that and try to build a genuine one so that they cannot have a business left.
Microfinance Focus: How do you see the microfinance condition in India? It is one of the fastest growing markets and is feared to be heading towards a microfinance bubble? So what’s your opinion on that?
Prof. Yunus: I don’t see how it can be a bubble unless you are making up a story. Bubble is not the reflection of reality. If you are lending money to real people, so this cannot be a bubble. Bubble is something like you have not achieved it but you says that it has been achieved.
Microfinance Focus: After Compartamos, SKS in India is issuing IPOs and many more MFIs will be following the trend. So what is your opinion about this trend?
Prof. Yunus: This is coming from the banking side, from the profit maximizing side and I am opposed to that. If they do it, I cannot stop them but I would encourage genuine microcredit programs.
Microfinance Focus: What is most important concern about IPOs?
Prof. Yunus: The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good.
Microfinance Focus: What are your expectations from this year’s Microcredit Summit?
Prof. Yunus: Expectation is to bring people together, discuss what is happening, sorting out the real microcredit programs. Who are real and who are not. Maybe we are sitting next to each other but we discuss that this is the line we draw and from tomorrow we are separate and we will work against loan sharks because you work against the poor people.
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