- Apr 19,2010
- In: Finance
Tiny Loans are Sprouting Big Fruit Bearing Plants for the Banks
Tiny loans are like small seeds that are sprouting big profit bearing fruits for the banks. Lately the idea has been gaining ground that small loans is the answer to improve the lot of the have-nots and the economy in general.
Celebrity actors like Natalie Portman and Michael Douglas gave supported the cause of economist Muhammad Yunus who brought about a silent revolution in Bangladesh and won a Nobel Peace Prize in 2006 for his efforts. It became the United Nations idea of the 2005.
But the idea has become so popular that those who sponsored it are now worried about the direction it is taking. A swath of banks attracted by the promised profits even from mini loans have jumped into the fray with interests spiking up to 100% and above.
Recently Yunnus said, “We created micro-credit to fight the loan sharks; we didn’t create micro-credit to encourage new loan sharks. Micro-credit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.”
The moot question revolving around the saintliness of the scheme is how much interest should be charged and profits pocketed? It comes down to the basic question of exploitation. The noise has caught the ears of the Congress especially at a time when the hearings of the House Financial Services are on full swing. The question is whether these micro-credit banks are actually scamming the underdogs.
There is no consistency in the rates globally but of most concern is what is happening in places like Mexico and Nigeria when the huge demand for small loans cannot be satisfied by the present crop of lenders.
Most of the websites dealing with micro-credit cash in on appealing pictures like that of the humble woman making her first income from starting a soap business in her kitchen. But Te Creemos in Mexico has the highest rate and fees in the micro-finance world – 125% annual rate. In Mexico the average is around 70% while the global average is 37%. But Mexico plays by its own rules because they get away with it.
A debate is raging fiercely as to whether micro-credit pulls up the person from poverty as is claimed. Recent research says that each and every poor person is not capable of being an entrepreneur. Professor Dean S. Karlan of Yale University said, “The lesson is simply that it didn’t save the world. It is not the single transformative tool that proponents have been selling it as, but there are positive benefits.”
If you like this blog please take a second and subscribe to my rss feed
Comments: No comments, be the first to comment
All the fields that are marked with REQ must be filled
Leave a reply