The Unethical Side of Micro-Lending

For Profits: The Unethical Side of Micro-Lending The original principle of micro lending is to provide start-up or expansion business loans to people living in less advantaged or impoverished countries who are unable to apply for traditional loans due to lack of credit history and/or collateral. Micro-financing is a great tool to create venture capital for those who would have no other means to secure it. The primary goal of micro lending, as established by Muhammad Yunus, the godfather of microcredit, is to eliminate poverty by means of giving all the opportunity to be self-sustaining with long term solutions. The principle of micro financing is the mutual benefit of relationship between microfinance institutions and the improverished, however one must note that there is a distinct difference in the for-profit and not-for-profit lenders moral standing when regarding profits. For-profit micro lenders maxmize shareholder wealth while non-profits use the profit to grant more micro-loans. Here is where the ethical dilemma lies not in the principle of micro-financing, but rather in the implementation, operations and profit distribution of for-profit micro-financing. Does for-profit micro lending widen the socioeconomic distribution among communities? Is it ethical to charge the least advantaged high interest rates, when they are the most in need of the loans? The theoretical principle of Utilitarianism a form of Consequentialism, asks society to maximize the good of the whole and states that the action is determined by the outcome. If we first look at the outcome of for-profit micro lending, we see that the high rate makes it more difficult for people to pay back the loan. For-profits generally charge a higher interest rate for loans and claim that it is because the risk is higher, however the microcredit loan repayment is 95-97%, with only a 3-5% default rate. A side-to-side comparision of two of Mexico’s top micro-financing instituions show that

References: http://microfinanceafrica.net/tag/unethical-practices-of-micro-finance-institutions/ http://www.centerforfinancialinclusion.org/Document.Doc?id=472 http://microfinanceafrica.net/news/central-bank-of-nigeria-knocks-microfinance-banks-over-unethical-practices BlueOrchard, http://www.blueorchard.org/jahia>Jahia * * The History of Microfinance, at http://www.globalvision.org/library/4/1051 * This one has info on the women borrowers in india that we talked about with your prof.. http://indiacurrentaffairs.org/unethical-practices-of-microfinance-institutions-and-women-of-the-self-help-groups/ Mix Market 2005, 2006; Rhyne 2007; Compartamos 2007; Rosenberg 2007; Chiapas n.d.; Al Sol 2007; Al Sol n.d.; Cámara 2007.