Need to draw a line between microfinance and loan sharking: Prof Yunus

Picture 129 Need to draw a line between microfinance and loan sharking: Prof Yunus

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.

© 2010, Microfinance News. All rights reserved. 2008-09

8 Comments on “Need to draw a line between microfinance and loan sharking: Prof Yunus”

  • Salah Boukadoum wrote on 24 April, 2010, 20:25

    My idea is to focus business investors on business, and microfinance institutions on microfinance – and connect the two together so that there is no conflict of interest between investors and MFI clients. The way we do this is called Good Returns. It’s very simple: a business and its investors make a commitment that before investors can take any dollar paid out from the business, the dollar must first spend one year interest-free at a non-profit microfinance institution. Another way to say this: every dollar of profit must do service for the poor before the investor can have it.

    These loans to non-profit MFIs are absolutely interest-free, so there is no pressure on the MFIs to generate any return whatsoever – just the initial capital must be paid back.

    The business does this for absolutely selfish reasons: you see, customers are more loyal to a Good Returns company and the local press will provide free publicity because of the venture’s social mission.

    I believe it is most effective to create structural forces that drive behaviors. Businesses are driven to make profits. In this model, the business does what it is best at, which is to optimize profits – but that role is kept far away from the poor, with the non-profit MFI safely connecting the business capital with the needs of the poor.

    My social business, Soap Hope (, is a living example of the Good Returns model. We invest 100% of profits into non-profit MFIs. We also use our business platform to educate our customers about our partner non-profits MFIs – by including materials in every order, and by sponsoring events for our partners.

    My goal is to teach 1,000 entrepreneurs how to implement Good Returns for helping to end poverty and thereby raise one billion dollars for microfinance. This explains how it is possible to raise one billion dollars this way:

    Dr. Yunus would not technically call my company a “social business” because it does ultimately generate profits for investors. But I think if I had the opportunity to explain this model to him, perhaps he would expand his definition of social business to include the Good Returns model. If you have an opportunity to share this information with him, I would certainly appreciate it.

    Salah Boukadoum
    Founder, Soap Hope
    “100% of our profits are invested to end poverty.
    You can help: tell someone you know about Soap Hope right now.”

  • ali wrote on 16 June, 2010, 14:39

    I take note of the difference between micro finance initiatives and micro-finance-sharking schemes that is prevalent in South Africa.

    Micro finance Sharking, is headed by A fully registered Bank which was declared Bankrupt a few years ago through mismanagement. How ever the favorable political climate at the time came into its rescue and through support of certain individuals within the ruling party motivated y their direct and indirect interest in the bank, have managed to lure the treasury and selected corporations, benefiting from Black empowerment programme , and rescue the bank from bankruptcy, then linking the bank with majour micor finance sharking accounts which were existed since apartheid regime, as well as putting together a quick fix regulatory laws which has legitimized the bank interest of minimum 60% up to 90% interest by such institutions. allowing a regulated micro-finance sharking through granting loans that are backed by various secure guaranties of legally deducting the salaries of unfortunate applicants and attachment of their homes and livelihood properties.

    As result many many poor applicants have fallen into the hands of such legitimized sharks and in many instances being rubbed of their homes and belonging through ignorance and exploitations. there are many examples of such applicants loosing their homes. behind their backs by such shark lenders and their shark attorneys. Their homes being auctioned and sold privately to the value of, in some instances at lower than $10. equivalent, and then the same home being rented to the owner of the house without them knowing anything about it. all legally and legitimately through such pushed-through legislation indicated above.

    I would appreciate your suggestions on how to address such micro finance sharking, in support of informative social activism and projects focused to deal with such problems.

    For your information the previously bankrupt African Bank is now ranked as of the most powerful banking institutions who owns several blue chip and upmarket shopping malls and properties in the country. and privileged holder of millions of such exploitative micro finance accounts whcih is earning the bank over 60% interest to its gross profits every year.

  • vivek john varghese wrote on 20 August, 2010, 18:35

    while i believe that micro finance institutions loan sharking is an absolute wrong the fact also remains that the lines are very blurred on what degree of costing is micro finance and what degree of costing is loan sharking. secondly i have problems with people saying that micro finance institutions should not make a profit. considering that large quantities of micro loans across the globe are provided by SHG’s and cooperative organizations any profit that they seek to make is for their own members; who are from the poorest of the poor communities to whom funds are being leant while it is also a fact that just as the honey pot attracts the bees who soon go on to make even more honey being a profit making enterprise attracts greater capitalization towards the MF initiative making available greater volumes of funds that can be used to bring people out of poverty.


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