Microfinance meltdown

The global economic downturn destroyed the image of big finance, but did nothing to tarnish that of microfinance, the altruistic business of making tiny loans to small entrepreneurs in developing countries. Recently, though, even microlending appears to be headed toward its own mini financial crisis.

Once hailed as a magic bullet against poverty, the practice has come under attack in India and Bangladesh where it is being accused of increasingly adopting the same loansharking methods that it is meant to rescue small borrowers from, like punishing interest rates. The backlash first originated in India, where a wave of suicides by farmers with outstanding microloans led local authorities to rein in financiers. Similarly, in neighbouring Bangladesh—the birthplace of the global microlending movement—regulators are planning measures that include an interest rate cap.

Microfinance firms deny wrongdoing, saying that charging hefty interest rates (usually around 30 per cent) is necessary to cover servicing costs in remote villages. But microfinance founder and Nobel Peace Prize winner Muhammad Yunus has been warning that high growth and high profits have been corrupting the industry. The concept of microcredit, he told the Wall Street Journal, “is being blatantly abused.”