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The success (or corruption) of Microfinance

Written By: Jason Shafrin - Jul• 02•08

This blog has repeatedly reported on the success of microfinance organizations such as Nobel-prize-winner Muhammad Yunus’ Grameen Bank and ACCIÓN (see 26 Mar 07 and 26 May 06 posts). Up to this point, the organizations who have worked to make loans to the world’s poor have been nonprofit organizations. Now, however, The Economist reports (“Doing good…“) that CompartamosBanco is a private for-profit business who is aiming to make money making loans to the poor.

Having for-profit businesses service loans shows that microfinance is expanding. The profits from these loans can be used to offer more and more loans to the the world’s poor. However, for-profit firms do charge high interest rates. Interest rates at CompartamosBanco are currently 79%. These figures are so high because it costs $152 to service the average $450 loan.

While Muhammad Yunus is somewhat troubled by the advent of for-profit microfinance, ACCIÓN has partnered with CompartamosBanco on some projects.

Should microfinance be a for profit business? What is your opinion?

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  1. Nothing wrong with the for-profits entering white spaces or to create more competition. In most countries, finance is in the for-profit center.

    While interest rates appear high in the short term, excess profits or cheaper business models are likely to lower those rates…those kind of innovations are more likely to come from disruptive, rather than existing players.

    In the end, learning how to reduce risk in the microfinance world is likely to create competitors better at underwriting than our current banks– the ones who have automated their underwriting based on mass market averages rooted in 1950’s statistical processing power and assumptions.

    I’m hoping we see private sector innovation– it’s going to be what replaces the behemoths in the current financial circles by offering better products or lower fees.