Nobel Peace Prize laureate Muhammad Yunus is considered the founding father of microcredit, who has been telling the world that his invention has resulted in elimination of poverty in Bangladesh and many other countries in the world. But reality is totally contrast.
Although an article published in The New York Times indirectly praises Banco Compartamos, a for-profit microcredit bank in Mexico despite the fact that its practices have drawn criticism from many traditional voices in the field.
The NYT article traces the path of Compartamos from its inauspicious origins as a non-governmental organization (NGO) begun by a Catholic social action group in 1990 to its current status as the nine hundred-pound gorilla of micro-lending in Mexico, a publicly traded company that critics claim is more interested in pleasing investors than alleviating poverty.
Recently, award-winning investigative journalist from Denmark, Tom Heinemann in an exclusive interview to Blitz said Banco Compartamos is charging two hundred percent interest rate thus further deepening poverty in the societies and pushing poor people towards debt trap.
It is learnt from media reports that Sam Daley-Harris, director of the non-profit Microcredit Summit Campaign, accuses Compartamos of “mission drift” – losing sight of the socioeconomic goals of microfinance in favor of maximizing returns for investors. Carlos Danel and Carlos Labarthe, co-executives and founders of Compartamos, are known to be have been pejoratively labeled “pawnbrokers” and “money lenders”.
With over 2.2 million customers in Mexico, Compartamos Banco is Latin America’s largest microfinance institution. Its corporate parent, Gentera, has similar operations in Perú and Guatemala.
Compartamos traces its origins to 1990 when it was started as an NGO aimed at alleviating poverty by providing loans to women operating small businesses in the model of Muhammad Yunus’ Nobel Peace Prize winning microfinance initiative, Grameen Bank.
By 2007, however, Compartamos had become a profit-driven entity that went public in a highly controversial secondary offering IPO which made eye-popping returns of roughly 100 percent a year compounded over eight years for the selling shareholders and turned its founders – Carlos Labarthe and Carlos Danel – into multimillionaires.
Despite the fact that Mohammad Yunus has been lending even grant money to poor with high interest rates he went to criticizing Compatamost and characterized the institution as one “raking in money off poor people desperate for cash”, a description also applicable to individuals and organizations involved in loan sharking.
According to The Economist, Compartamos Banco, a Mexican lender to the poor, went public in 2007, a rift has been growing in the booming microfinance industry. To supporters of traditional charitable microfinance – providing loans and other financial services to help lift people out of extreme poverty – the Compartamos initial public offering has come to symbolize an aggressive move by capitalists to profit from the poor. To its backers, on the other hand, the success of Compartamos, despite the recent lackluster performance of its shares, symbolizes how the profit motive can help lift many more people out of poverty than charity alone could ever do.
Meanwhile, we have received information about a microfinance company named ‘Bandhan Bank’ that operates in India. Few years ago, this Kolkata-based microfinance has emerged into a full-fledged bank.
According to media reports, most of the loans accrued by the villagers are from Bandhan Bank, and the infamous loan with more than 28 percent interest rate given to sharecroppers is termed “Bou Bandhaki Loan” (Wife Mortgage Loan).
In many cases, the poor, marginalized farmers have alleged that microfinance organizations have made the farmers sign documents that they cannot read or do not understand the contents of such contracts. Even after making payments regularly, many alleged they were suffering even if they have faltered on a single instalment to repay their loans during the COVID lockdown period.
Bloomberg in a report titled ‘Big money backs tiny loans that lead to debt, despair and even suicide’ said: Suicides, debtors’ prisons and delinquent borrowers forced to sell their land – the grim social costs linked to microfinance a decade ago were supposed to be a relic of the past. But efforts to clean up the industry lost momentum, and today billions of dollars are flooding into a system that promises the world’s poor a better life while often compounding their misery.
Government aid agencies, commercial banks, nonprofits and socially minded investment firms are pouring record amounts—more than $50 billion of committed funds in 2020, industry data show—into an international array of lenders. The infusion of capital has continued despite annualized interest rates that can top 100% and aggressive debt-collection tactics that have left some borrowers homeless.
As financiers have replaced philanthropists in the microfinance industry, consumer protection has been weakened. Taxpayer-funded development banks, which could fix the problem, are instead channeling hundreds of millions of dollars earmarked for poverty alleviation into some of the most predatory lenders.
Interviews with dozens of borrowers in Cambodia, Jordan, Sri Lanka and Mexico, as well as with lawyers, academics and human rights groups, paint a picture of a changing industry, one that’s offering new types of loans, including consumer finance, as some lenders prioritize profits over helping the poor.
In Cambodia, the average loan provided by so-called microfinance institutions has ballooned sevenfold over the past decade to about $4,200, almost three times the country’s average household income, data compiled by the Cambodia Microfinance Association show. Women there have been pressured to sell their homes to repay loans, according to human rights groups and academics who have studied the matter. In Jordan, one of the few countries that still imprisons people for nonpayment of debt, more than 23,000 women were wanted by the police in 2019 for owing less than $1,400 each, Justice Ministry officials have said. In Sri Lanka, consumer-advocacy groups estimate 200 women indebted to microfinance companies committed suicide in the past three years.
Yet the World Bank, the European Investment Bank, the US International Development Finance Corp. and other development banks continue to invest billions of dollars of public money. More has come from commercial banks and impact investors. Citigroup Inc. had lent about $1 billion to 89 microfinance institutions as of January 2020. Japan’s Sumitomo Mitsui Financial Group has invested billions of dollars in Asian firms, including in Cambodia. JPMorgan Chase & Co. sold a $175 million collateralized loan obligation in 2019 backed by microfinance and small-business repayments.
Among the 26 lenders it’s funding are three accused of pressuring borrowers to sell land in Cambodia. JPMorgan declined to comment, and Sumitomo didn’t respond to inquiries.
A wave of suicides in India a decade ago challenged the idea that microlending might eradicate poverty, but today’s more modest goal of financial inclusion, an attempt to reach people without access to the banking system, is no less fraught. The expansion of the loosely regulated business—all those loans added up to $160 billion in 2020, about twice the amount 11 years earlier, according to industry estimates—has resulted in millions of new borrowers for whom the dream of inclusion has turned into a nightmare of debt.
Blitz shall continue to further investigate this extremely important issue, where microcredit or microfinance enterprises are continuing to make huge profit at the cost of poor people throughout the world.
