In an article in the Economist magazine entitled ‘Froth at the bottom of the pyramid: Is microfinance going the same way as subprime mortgages’ [1], the Economist continues the controversial debate on the ‘microfinance bubble’ that was initiated by a series of provocative articles on the Wall Street Journal and a subsequent blog on the Reuter’s website. These articles have been discussed in previous Microcapital.Org publications [2], [3], [4]. The Economist draws our attention to a view put forward recently by Mr Vikram Akula, founder of India’s SKS Microfinance [5], who expressed disappointment at the recent ‘unbalanced and misleading’ views on microfinance investments and ‘absurd’ sweeping generalisations drawn from anecdotal evidence in one neighbourhood. The Economist reminds us that SKS is about to go public in a ‘doubtless lucrative’ IPO but the views of Mr Akula resonate with the views of other participants in the microfinance sector. Mr Alvaro Rodriguez, former chairman of ACCION International [6] and now chairman of Compartamos Banco [7], finds it hard to see how there can be a ‘bubble’ when, according to estimates, ‘there are currently 100 million microfinance clients out of one billion poor people who want access to financial services’. He added that competition among investors may generate a ‘gold rush’ and lead to ‘frothy lending’ in some instances but stated that competition is a good way to introduce innovation, greater efficiency, better products and pricing into any industry, a development he added that will ultimately benefit the microfinance customers.
At the other end of the spectrum, John Murdoch of New York University and co-author of the book ‘Portfolios of the Poor’ [8] was quoted as stating that the problem of a ‘microcredit bubble’ should not be dismissed. He acknowledged that the repayment and over-indebtedness crisis that has hit some countries may be due to ‘moving too much money out of the door too quickly’ such that ‘[microfinance] clients could not absorb it’. He added however that whilst there may be ‘localised bubbles’ in microfinance, there is no evidence to suggest that we should expect anything like a ‘global bubble’.
A comment to the article in the Economist is worth noting. The commentator’s view reads as follows: ‘While there is reason to be cautious, I do believe that [overall], microfinance, when handled with care and accountability, is a definite benefit [to] the world’s poor. As an emergent industry, checks and balances will need to be strengthened. The bottom line is that microfinance is banking for a segment of the world’s population which have been excluded from financial services. Banking, whether in the developed world or the third world, still needs to be provided in a prudent fashion.’
Related Microcapital.Org publications on the issues raised here have been set out in the Bibliography section below.
By Chinq Yee Chong, Research Assistant
Bibliography
[1] Article in the Economist magazine entitled ‘Froth at the bottom of the pyramid: Is microfinance going the same way as subprime mortgages’ http://www.economist.com/businessfinance/displaystory.cfm?story_id=14298996
[4] MICROCAPITAL.ORG STORY: Wall Street Journal Warns Of Negative Consequences Of Group Lending
[5] SKS Microfinance response to Wall Street Journal article ‘A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum’: http://www.sksindia.com/streetjournal.htm
[6] ACCION International: www.accion.org/
[7] Compartamos Banco: www.compartamos.com/
[8] Information about ‘Portfolios of the Poor’: www.portfoliosofthepoor.com/
Similar Posts:
- MICROCAPITAL BRIEF: Money Transfer Firms Suspend Fees for Payments to Libya, Morocco in Response to Disasters
- MICROFINANCE PAPER WRAP-UP: “Impact of Microcredit on Household Consumption and Assets in Nepal;” by Shalik Ram Pokhrel
- MICROFINANCE PAPER WRAP-UP: “Land Titling and Microcredit in Cambodia: Examining the Reality of Hernando de Soto’s ‘Three Steps to Heaven,’” by Milford Bateman
- MICROCAPITAL BRIEF: Accion Venture Lab, Brick & Mortar Ventures Lead $3.4m Equity Raise for Licify to Expand Vende+ Construction Portal from Colombia to Mexico
- MICROCAPITAL BRIEF: Bababos of Indonesia to Expand Digital Platform for Manufacturing SMEs with $3m in Seed Funding
