• Lisa Simpson
• Jul 6,2010
• In: Foreclosure

Small Loans and Charging Exorbitant Interest

A new way of earning on the backs of the poor has started with the move taken by Yunnus in Bangladesh. But the proponents of the idea did not scheme on giving small loans and netting in abnormally high profits by charging exorbitant interest. However it is being admitted that the days of earning just enough to make up for the bare costs have become history.

Chuck Waterfield said, “They call it ‘social investing’, but nobody has a definition for social investing; nobody is saying, for example, that you have to make less than 10% profit.” His website encourages transparency and is funded by mega micro-finance investors.

It is not illegal to pocket huge profits from micro-financing. A humanitarian organization based in Atlanta, CARE, set up a micro-finance entity in Peru in 1997. The investment in the beginning was about $3.5 million – it being inclusive of $450,000 of taxpayer’s dollars. But last year Baco de Credito, a mega bank of Peru, purchased the enterprise for $96 million. From this CARE took $74 million.

Helene Gayle of CARE sid, “Here was a sale that was good for Peru, that was good for our broad social mission and advertising. The price of the sale wasn’t the point of the announcement.” Gayle referred to the new owners as dedicated to the same type of social commitment to erase poverty. CARE is thinking of using its funds to extend same moves to other countries.

There is no doubt that the micro-finance movement with assets running into $60 billion, has superseded its charitable beginnings. In a congressional testimony, Elizabeth Rhyne of Center for Financial Inclusion said that financial entities including banks served about 60% of all its clients. Non-government bodies served 35% of its customers and credit saw to the interests of 5% of the customers.

It has been ten years since private funds have started to enter the micro-finance zone. But the investors awoke to the full potential of its profit making capacity when Compartamos of Mexico starting off as a mini non-profit group, created in 2007, $458 million via a public stock sale. It was then that rumblings were heard about its money making potentials.

The founders of Compartamos had promised to channel back the money into progress for the poor, the analysts contend that high rates of interest and in this biggest micro-finance entity of the western hemisphere with a listing of 1.2 million borrowers will drive up the rate of interest of all in Mexico.

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