The Microfinance Crossroads

Keeping the Focus on Poverty Alleviation

It didn’t take long for microfinance, the capital-based strategy to alleviate poverty, to become a pathway to profits for banks. Tiny loans are now big business. But at NamasteDirect, we’re still leveraging the power of microenterprise to pull people out of poverty, and we still measure our success by the number of our clients that improve their businesses.

A recent article in the New York Times highlights the growing number of microfinance institutions (MFIs) that are putting profit before people. According to the article, the booming industry has some serious issues: Microfinance banks are making big profits from high and often unconscionable interest rates; the social benefits of microloans are debatable; transparency is lacking, sometimes intentionally so; and lenders are coming under scrutiny, often with embarrassing results.

An Eye on Interest Rates

An estimated two billion people live on less than $2 per day. This is the so-called bottom of the pyramid market that mainstream banks now find impossible to ignore. Many of these banks and other organizations charge interest rates on microloans that are hard to justify. According to The Times article, the global MFI rate is about 37%, with rates averaging 70% in some countries such as Mexico and Nigeria. Many MFIs point to the high costs of reaching the poorest, most inaccessible borrowers with tiny loans that are cost inefficient. Because most MFIs use flat-rate interest calculations, for operational reasons, they do not make it clear to either borrowers or the general public that their effective annual percentage rate (APR) is almost double their published rates.

NamasteDirect approaches the interest rate question differently from the rest of the industry.

We do not look at our internal costs or profit margins to dictate rates to our clients. Our mission is to assist borrowers in building a business that has the potential to be bankable in the commercial sector, so we look to that sector for interest rate benchmarking. In Guatemala, for example, commercial banks charge business borrowers 18 to 24% on a loan. Namaste charges an effective rate of 21%, putting us in the mid-range of what qualified businesses pay. But a loan is only a small part of what we do. While almost all MFIs exist to make a profit, we exist to increase the profits of our clients, by providing unique business training and capacity-building services. It's what makes us so different.

Let the Sun Shine In

As with any financial product or service, a lack of transparency is never good for the consumer. With microcredit loans, where borrowers are often desperate and barely literate, misleading or obscure loan packages can be devastating.

Unfortunately, many MFIs obscure basic facts about their operations, facts that are of interest to donors and borrowers. Many other groups hand out loans indiscriminately, allowing impoverished borrowers to stack loans.

When it comes to microfinance, we believe that there are basic questions that any lender should be able to answer:

• Just how poor are the borrowers?
• Are the borrowers are using the loans for consumption, rather than for building their businesses?
• Are loan repayments actually being made from business profits, or by borrowing from another MFI (like credit card ‘pyramiding’), or even by remittances from family members living abroad?

If an MFI that claims to be fighting poverty cannot answer the above questions about their clientele, red flags should go up. For our part, this critical data drives our process: The daily income of each Namaste client, which is the most common measurement of poverty, is quantified at the beginning of the loan cycle and entered into the borrower's record. Within 30 days of receiving the loan, our borrowers must satisfy their personal business adviser that they have invested at least 80% of the loan proceeds into their businesses. Clients must demonstrate that their business profits have been sufficient to be the source of loan repayments. All of this information is part of the client records stored in Namaste's online database, which we are working to make accessible to all stakeholders with an interest in our clients’ loans.

A Panacea for Poverty?

The Times article quotes Dean Karlan, a Yale economics professor, as saying that microcredit "is not the single transformative tool that proponents have been selling it as, but there are positive benefits." The relationship between microloans and poverty alleviation is not well known, largely because MFIs do not perform socio-economic impact assessments. Instead, their measurements are focused on their own internal operations.

We believe that a loan alone is not enough! Our package for economic empowerment includes business development training, financial literacy and a personal business advisor for every client for two years. Furthermore, we believe that the effects of microloans on poverty reduction are generally unknowable without contemporaneous and specific measurement, which is why we measure the monthly business income of our borrowers, to see what impacts the loans and business development services we provide are having on our clients. We are only successful if our clients’ businesses improve.

Recently, the global economy barely survived a complete and total melt down because lenders were (and still are) under inadequate scrutiny by government regulators, by investors and auditors; by the press and by the general public. The Namaste position is to "let the sun shine in"; it can only result in a better situation for borrowers, institutions, and society at large.

If you have any questions at all about our operations, our clients, or our organization, please contact us and we will get back to you as soon as possible.

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