Mohammed Yunus, an economist from Bangladesh came to America for studies and on returning home in the nineteen seventies, pioneered micro-credit financing for the poor. His borrowers were mostly women who borrowed small sums like fifty dollars and used it to start or run a business, like a telephone kiosk, sewing, rolling tobacco bidis (cigarettes) etc, from their home. They had no collateral to offer and no access to banks. Many were illiterate and had used the services of village moneylenders charging usurious interest rates of hundred percent per annum or more. Mr. Yunus, a genuine do-gooder has built up his Grameen Bank into a billion dollar organization by providing financing at less than 20% per annum and alleviated poverty. He received the Nobel Peace Prize and deserved it and also received the US presidential medal of freedom at the hands of the undeserving Nobel Peace Prize winning warmonger Obama.
The World Bank and UN agencies have provided support for micro-finance lending to the poor and many developing nations have emulated Dr. Yunus and presently have a host of such lending agencies. In the eighties American banks and credit card companies bribed the corrupt US Congress to lift the ceiling on interest rates on credit cards and revolving lines of credit, to compete with the Mafia. Delaware and South Dakota in a race to the bottom were the first to allow usurious rates on credit cards and thus benefitted by many credit card and banks shifting such lending operations to the permissive states. A variation on this theme was utilized by other non-bank lending companies to open up financing shops and check cashing outlets charging interest rates in tens or hundreds of percent per annum.
Hedge funds, Venture Capitalists, Private Equity funds frantically looking for a quick buck saw a great opportunity in micro-finance lending to the poor. Even a charitable operation like that of Dr. Yunus had to pay 12% to the bank which lent the money without collateral and had to charge 18 to 20% to the poor borrowers without collateral. The six or seven percent net interest margin was required because of high overheads and building the infrastructure. Since there was no regulation of the interest rates and the whole gimmick was new, many sharp operators started micro-lending institutions and charged lending fees of 30 to 100% per year and could afford to pay capitalists 20% or more and still have a ten percent or greater net interest margin. Since the borrowers were mostly uneducated and unsophisticated women from Asian, African and Latin American countries without a better alternative, they were a captive audience for moneylenders before and micro-finance institutions now.
It didn’t take long before some smart persons with the help of lawyers and investment bankers restructured these lending institutions from non-profit entities to the same with a separate profit making subsidiary which attracted investment capital from the likes of hedge funds and private equity players like George Soros and Vinod Khosla. Two recent events highlight the newest legal twists. Mexico’s Banco Compartamos began as a non-profit institution but eventually had a for profit subsidiary which charged interest rates of 125% per year. The official rate was 4% per month but hidden fees raised the rate to over 10% per moth. Others used the gimmick of defining a month as four weeks and thus required 13 payments a year. The Mexican profit making subsidiary was doing so well that it decided to go public and garnered over 450 million dollars in its IPO, rewarding the initial investors with munificent riches.
The second example is that of an Indian profit making subsidiary SKS Microfinance. It is expected to raise 350 million dollars in the near future. Vikram Akula, a founder of the non-profit created the for profit subsidiary and obtained venture capital from Silicon Valley. He has already sold part of his holdings for over 10 million dollars and will still hold options and stock worth millions more. A charitable entity named Unitus from Seattle will reap millions from the stock offering and even though it is itself a non-profit entity, it and some of its officers have invested substantial capital and stand to gain millions. What is even more amazing is that Unitus has announced that it is closing its involvement in micro-finance and laying off all its employees while refusing to give further future details after its windfall, because of its legal obligations of a quiet period as a promoter of the IPO.
Dr.Yunus has severely criticized this maximizing of the profit making arms and closure of the non-profit. Chuck Waterfield, a Columbia University professor and micro-finance expert started MicroFinance Transparency, an organization that reports on the interest rate and governance of institutions involved in micro-finance in the countries of the world. Such a watchdog has become essential to protect poor borrowers from being ripped off by smart enterpreneurs in the guise of altruistic and charitable do-gooders.