Lining Up the Loan Angels

OK, but is survival a real business model? Grameen Bank claims it's making a profit, with a repayment rate of 98 percent on loans to business at 20 percent interest rates for business, discounted to 8 percent or less for households and students. But critics say lenient accounting masks higher real default rates. Yunus is unapologetic. "We created a bank based on a completely new set of premises and procedures," he says. Other institutions have quietly upgraded their client base to make a profit (liberal analysts call it "mission drift"). Still others charge rates up to 100 percent, inviting comparison to loan sharks they were meant to replace. Bernd Balkenhol, chief of social finance at the International Labor Organization, says the "initial euphoria over profitability" underestimated the cost of reaching out to the poor, and "probably needs to be re-viewed and diluted."

Consider: in Brazil, chronic underpayment by 1.3 million struggling subsistence farmers has forced the treasury to pick up nearly half the lenders' costs for the mass rural credit program, PRONAF. Critic Milford Bateman argues that international microlending in Bosnia bankrolled "a primitive 'bazaar economy' redolent of life 100 years ago." Chinese lenders are floundering because "they are small-scale" and lack professional management, says Jiao Jinpu, a top researcher at the People's Bank of China. In Bangladesh, birthplace of microfinance, poverty is worse than ever, says Dichter. "Fixing poverty is hard work," he says. "It takes institutional reform and cultural change. You can't fix these things by bringing in a truckload of money."

Does that mean the microfinance boom will end as a bubble? "Perhaps, if lenders are looking for a short-term return," says the Grameen Foundation's Counts. "People get a reality check when they're trying to serve the poorest 3 billion people in the world." That may be the one claim in the poverty-lending business that everyone should bank on.

With Silvia Spring in London, Joe Cochrane in Jakarta and Melinda Liu in Beijing

© 2007