Disinformation on Microfinance Hurts the Poor

January 17th, 2011 by Dave Leave a reply »

Muhammad Yunus’ OpEd piece in Friday’s New York Times entitled Sacrificing Microcredit for Megaprofits is plainly and simply factually challenged.  Yunus advocates for changes which will result in fewer of the working poor receiving quality financial services and those who do will pay more for those services.

[NOTE:  Those of you who read my blog know that I have been a big fan of Yunus and his innovative contributions to the microfinance sector. But, more recently he has instigated a fierce vendetta against some of the strongest innovators in the microfinance space which undermines his credibility as an advocate for the poor.  I honestly don’t know why he is doing this.  See references at end of this post.]

Bad Facts Lead to Bad Conclusions

Yunus has misrepresented facts which leads him to wrong and harmful conclusions.  Here are some examples:

  • “[commercial microfinance] banks needed to raise interest rates.” False. Microcredit interest rates for well-run, commercial microfinance operations are often lower than for non-profit microfinance operators.  What’s even more interesting is the fact that SKS Microfinance’s microloan interest rate is 24.55% APR vs. Grameen Bank’s interest rate of 24.36%-26.87% APR despite SKS having a much higher cost of capital since it can’t accept savings.
  • “borrowers [in India] came to believe lenders were taking advantage of them, and stopped repaying their loans.”  False. Populist politicians created falsehoods about microcredit loans leading to borrower suicides and enacted laws which prevented borrowers from repaying.  Fact: microcredit borrowers were 5-10x less likely to commit suicide then the general population.
  • “[commercial microfinance operators] treat microcredit as an ordinary profit-maximizing business.” False. Neither SKS nor Compartamos have operated in this way.  In fact, they have always been managed as client-focused, sustainable businesses.  See letter to editor below.
  • “Furthermore, it means commercial microcredit institutions are subject to demands for ever-increasing profits, which can only come in the form of higher interest rates charged to the poor, defeating the very purpose of the loans.”  Sounds credible, but too simplistic. Just about every growth business achieves higher profits through scale and additional services, not higher prices. Think Walmart, Google, Bharti or … SKS.

Here is a letter that Michael Chu, a respected microfinance expert submitted to the NY Times in response to Yunus’ OpEd:

Sunday, January 16, 2011 5:10 PM
To: letters@nytimes.com
Subject: Muhammad Yunus Op-Ed

To the Editor of the New York Times:

Having served in the front lines of microfinance for two decades, I found Muhammad Yunus attack on commercial microfinance (Op-Ed, January 14, “Sacrificing Microcredit for Megaprofits”) dangerously misleading at a time when the industry most needs clarity. His accusation that commercial microfinance inevitably leads to higher prices is plain wrong. Since its IPO in 2007, Mexico’s Compartamos Banco, which I am proud to have helped establish, has actually been reducing its interest rate (and, by the  way, tripling its active clients.) Yet, Compartamos has continued reporting outstanding financial returns. How is that possible? Simple: cost structures can be lowered, assets more efficiently managed and capital structures optimized. As any able manager knows, price is only one, and often the crudest, lever of profit.

But even more damaging, Yunus calls for government-mandated interest rate caps. This ignores the Latin American experience, where such short-sighted measures have always made reaching the poorest, and their smaller-sized loans, not more but less viable. Intense, open competition has been the most reliable way to ensure that the lowest priced loans reach the largest number of the poor in the shortest amount of time. That is why Bolivia has the lowest microfinance rates in the continent. And for that you need a healthy, commercial industry serving the poor.

Michael Chu
Senior Lecturer
Harvard Business School

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3 comments

  1. From Plano says:

    Read an interesting article in the following link which debunks the claims made by a couple of authors who, in their article, tried to point out why Dr. Yunus’ micro-credit program was a failure. The article published in the Harvard Business Review was thoroughly discredited by the blogger in the following piece:
    http://curvylens.blogspot.com/2011/03/enemies-of-dr-yunus-enemies-of.html

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