The challenges of microfinance

Marketplace Staff Jul 2, 2010

The challenges of microfinance

Marketplace Staff Jul 2, 2010


Tess Vigeland: Microfinancing has become trendy over the past few years. Thousands of ordinary people have given small loans to farmers in Namibia or corner store owners in Kazakhstan. You give to Kiva.rg or, they find a lender in-country to dole out the money. But it turns out your charitable gift could be headed straight into the pocket of the lender. Neil MacFarquhar wrote about this recently in the New York Times. Welcome!

Neil MacFarquhar: Thank you. Glad to be here.

Vigeland: So it seems like microfinance got out of the gate really quickly. It got a lot of attention, a Nobel prize a few years ago for its creator, and I guess maybe it just takes time to see some of the rough edges of something like this?

MacFarquhar: I think it started out as a do-good project, but gradually over the years — especially in the past decade — as it became clear that you could make a profit at it that anybody who lends money to the poor slaps the name microfinance on it. And I think that’s what’s giving some of its founders pause.

Vigeland: Well what are some of the problems that have emerged as the appeal of this kind of lending has grown?

MacFarquhar: Basically it’s just that there isn’t really a standard of where to set interest rates and profits and so some companies — particularly in countries like Mexico and Nigeria, where the demand is really high and the amount of money available is lower — people can charge pretty much whatever they want. And so they see high interest rates and high profits.

Vigeland: And talk to us about how this is happening. You know, here on the show, we’ve profiled organizations like From what I understand, the issues are not necessarily with those organizations, but with the folks who are doing this on the local level, at the ground level.

MacFarquhar: Organizations like Kiva, they don’t always do due diligence about where that money is going and what interest rates the organization is charging. And I found one, called LAPO in Nigeria, and Kiva had an outdated interest rate of 57 percent, whereas the real interest rate was above 80 percent. So that’s where the debate is around in the microfinance community. It’s like how do you set a fair standard for reasonable interest rates and reasonable profits and still carry the name microfinance?

Vigeland: Yeah, even at 57 percent — that sounds like an enormous interest rate.

MacFarquhar: It costs a lot of money to lend to people in poor or rural areas that can be inaccessible. And it varies from country to country because in Bangladesh you don’t have to pay a loan officer that much whereas in Mexico you do because it’s a middle class society. But the idea is to find some formula that allows microfinance institutions to make a reasonable profit so that they’re sustainable and they can continue working, but not that they’re making 25, 30 or higher percentage point profits on the backs of the poor.

Vigeland: So is it possible to say exactly who’s cashing in on the back end? If something shady is going on, is that happening at the local level or is it happening at some of these name organizations that we know?

MacFarquhar: There are thousands of microfinance institutions around the world and it’s a $60 billion industry, as it were. So it’s hard to quantify because there is no sort of super organization policing it. But there are a couple organizations that are trying to sort of set standards. One’s called the MIX Market, and they ask microfinance institutions to report their own numbers and they put them up on the website for everyone to see. But there again, they rely on the organizations own numbers. So you kind of need an independent auditor to go behind them to see if they’re being honest.

Vigeland: Neil MacFarquhar is the United Nations bureau chief for the New York Times, and we’ve been talking about some issues with microlending. Thanks so much for your time.

MacFarquhar: Anytime.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.