The Fine Print On Microfinance

Hugh Sinclair, author of Confessions of a Microfinance Hereticchastises the microlending industry for interest rates that often exceed 100%:

Microfinance has been overhyped as a miracle cure [for poverty] and has managed to attract money in vast sums. Currently the private microfinance capital invested is about $70 billion. The problem is that when you’ve got a $70 billion sector you’ve also got something on the order of $30 billion a year being paid in interest. This is money that is being taken out of poor communities. People talk about the positive impacts but don’t talk about the negative impacts — the hidden side of microfinance. …

In practice, it’s not actually clear that the money is being used for any entrepreneurial activity whatsoever.

John Hatch, the founder of FINCA, a very large microfinance network, estimated in the Harvard Business Review that 90% of microfinance capital is used for consumption — that is, used for buying a TV or clothes — and that very little gets to any entrepreneurial activity. The head of the Zambian Central Bank came up with the same estimate recently. No one knows exactly, because it is hard to measure the proportion of loans spent on consumption or used to pay off other loans, but what is interesting is that no one wants to discuss this.