Ethics Newsline®

Critics say interest rates are too high, but microlenders note that it’s expensive to service small loans, especially in remote areas

NEW YORK
As microlending — the process of offering tiny loans to people who ordinarily might never come into contact with a bank — has demonstrated its potential for helping entrepreneurs in impoverished nations, a heated debate has begun to brew about the ethics of the practice, according to a piece published last week in TheStreet.com.

Writer Lauren Tara LaCapra notes that microloans typically come with high interest rates because such small lending is expensive to service, especially in poor, remote, and rural areas.

Some microlenders, she writes, have been accused of exploiting clients by pushing interest rates far above what it costs to grant the loans.

LaCapra put the question of ethics to Gerhard Bruckermann, a noted European banker who started AMK, a nonprofit that provides small loans to villagers in rural Cambodia.

“We’re serving more than 120,000 customers, and as is typical for a microfinance institution, something like nine out of 10 customers are women,” Bruckermann told TheStreet.com. “So far we only operate in rural areas, which is of course much more complicated than urban areas. You spend a lot of money simply getting to the village.

The average loan size is less than $100, so what we’re really talking about is buying fertilizers, buying seeds, helping thorough drought times, when there are emergencies in the family and they need medical treatment. We’re not talking about [starting up] small companies — this is micro, micro, micro.”

Bruckermann said his lending organization charges between 28 percent and 32 percent.

“And you say, ‘Wow, how the heck are they going to survive this?’” Bruckermann said. “You look at the high interest rate and say, ‘This is really exploitative.’ But this is really all absorbed by the high operating expense. The loans are really small and you need this interest rate simply to cover your costs.”

Bruckermann maintains that socially responsible investors can make a lot of money if a microlending venture makes it to the point of an initial public offering. But he notes that his firm is committed to investing its profits back into other social investments.

Source: TheStreet.com, July 28.

For more information, see: Related Newsline story, June 16 — Related Newsline story, June 2 — Related Newsline story, Feb. 25 — Related Newsline story, Feb. 18 — Related Newsline story, Jan. 28.