Banks Charge Interest of 100% or More on Loans to Poor

The pernicious shame we now know as "this economic recession" now sports a new bedfellow. As if duping tens of thousands of people into imprudently securing loans which could never realistically be paid off was not enough, a recent New York Times report tells us that financiers have now taken their scurrilous practices to the poor. The United Nations has hailed the practice of offering microloans (also called microcredit and microfinance) as a long-hidden solution to helping poor businesswomen and men in the world's poor and developing nations.

Microloans recently appeared on an otherwise bleak horizon when introduced by economist Muhammad Yunus, who provided small lines of business credit for basket weavers in Bangladesh. In 2006 Yunus won a Nobel Peace Prize for his efforts in leveraging microloans, and the practice has since enjoyed endorsement by such big names as Michael Douglas and Natalie Portman.

Shameful Profiteering

In spite of its originally beneficent origins, the allure of profits derived from even the smallest of microloans has drawn the attention of financial sharks from all reaches. The New York Times reports of financial institutions and banks raking in sizable revenues from microcredit issued at staggering annual rates of 100% or more.

At a recent gathering of financial officials at the United Nations, Mr. Yunus struck out at the issue:

"We created microcredit to fight the loan sharks; we didn't create microcredit to encourage new loan sharks. Microcredit 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."

How Blatant Must Blatant Exploitation Be?

While rates vary widely across the globe, the ones that create the most concern appear in countries such as Nigeria and Mexico.

Take for example prominent Mexican lender Te Creemos - whose moniker is aptly translated as "we believe you." Analysts surmise Te Creemos provides microfinancing at heart-stopping annual rates of 125%. Following initial claims to some kind of "misunderstanding" regarding such high rates, calls to this lender's director of risk and internal control have recently gone unanswered.

At the beginning of all discussion is the question of acceptable interest rates. While in some economies rates upwards of 20% or higher may hedge on the limits of questionability, an interest rate of 125% shows a face of outright exploitation. How blatant must blatantly wrong be?

Whither The Credo of Microcredit?

What was once drawn up as a truly philanthropic endeavor marked by realistically repayable loan rates now stands to topple at the hands of big bank exploitation. With such exorbitant interests rates, at the heart of all discussion is whether microfinancing will render effete its original purpose: to help small business owners in developing nations rise up.

As if duping tens of thousands of people in developing nations was not enough, financiers have taken their scurrilous practices to the poor. Whither the philanthropic credo of microfinancing?

Whither the credibility of the finance industry, now turning upon the world's poor to further plunder and spoil?

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Sources:

"Big Banks Draw Profits From Microloans to Poor", New York Times