Is Microfinance helping the poor?

I always have mixed feelings about Microfinance. On the one hand, it is what many MSMEs (micro, small and medium enterprises) need because they are not yet “bankable.” On the other hand, it really only enriches the financiers or investors, while making it more difficult for borrowers to get out of their financial rut.

What really is the main business of Microfinance? Is it not unlike a pawnshop where the “non-bankable” goes to part with something really important to him or her (a piece of jewelry, a watch, a gadget) during crunch time and money is hard to come by?

Investors who fund microfinance companies claim altruism as their main business objective. But is it not really just an easier way of making money? The lines between helping and lending at usurious rates are blurred.

Filipinos are very creative. Today, they do not pawn jewelry or gadgets. They pawn ATM cards. They actually pledge money they have yet to earn. At 6%-8% a month?

Now, that is usury!

It is downright immoral and I think even illegal.

If individual and private investors are doing it and making gazillions of money in interest, why do not our banks create a Microfinance scheme for the MSMEs? Or maybe some NGOs can establish lending companies with a heart.

And I quote from Wikipedia: Usury is, today, the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of excessive or abusive interest rates or other factors. Historically in Christian societies, and in many Islamic societies today, charging any interest at all can be considered usury. Someone who practices usury can be called a usurer, but a more common term in contemporary English is loan shark.

What is the choice of people who have urgent needs? Some bankable ones use credit cards. Again, look at the monthly rate of banks. Do not just look at factors, rather ask your bank what the credit card interest on “revolvers” (those who do not pay the full amount due). You may be surprised it can go as high as 3.5% per month!

If you do not have a credit card, what do you do?

An investor justified his business model by telling me he charges less than the “5-6” lender. It still is a whopping 24% per annum, but yes it is lower than the usual loan sharks. Is his business model justified? Is it sustainable? Is it not enriching oneself with other people’s hard-earned money? Let’s give Microfinance some thought. Is it the business model to get our poor out to become the entrepreneurial poor? Or does it further push them down the tubes?

What kind of financing can we offer if our borrowers are not even financially-literate? Should not our lending companies be compelled by law to teach the borrowers to be financially-smart? Should not banks teach people how to become smart borrowers to eventually graduate to become prime borrowers?

And why are prime rates reserved for the rich and bankable while start-ups have to borrow at higher rates? I know it may seem elementary to bankers and investors. But not for entrepreneurs. And much less to the hapless helpless MSME or small employee who is trying to eke out a living in an honest manner.

There ought to be a law.