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The Problem With Predatory Lenders and The Microfinance Solution

Many times on this blog, we have brought up microfinance’s role in breaking the “cycle of poverty.” We place a great deal of importance on this issue as the repetitive nature of poverty means that breaking the chain for one person can mean that their entire family will not be brought back into that vicious circle. For most impoverished people in developing countries, there are often no safety nets to catch them in a time of drought or recession. Instead, they turn to the only source of capital that is available for anyone the world over: Loan sharks. Because impoverished people are rarely approved for bank loans, or sometimes live too far away from the nearest city to visit a bank, these predatory lenders corner the financial market of desperation and can charge whatever interest rates they please. In the Philippines, where we operate a microfinance program, interest rates can reach as high as 50%.

The great importance of microfinance is lending credit to those who do not have access to it. The common denominator between anyone who has started a business, bought a home, or financed a dream, is that all of their paths most likely began with taking out a loan. Without access to capital, there is no bettering of surroundings, no genesis of business, and no stable foundation on which a future can be built. Because the need for capital does not go away when access to banks does, predatory lenders are often the only game in town. For those trying to better their lives and their surroundings, the already steep climb becomes almost vertical when they owe as much in interest as the loan itself.

Not only is a microfinance loan a safer source of funds, but it also can grow much more than the bottom line of a business. Good Fund, a fellow microfinance organization that operates in the United States, reported an average credit score increase of 73 points and a 68 percent decrease in the use of predatory loan services. Microfinance is by no means an end-all solution, but rather a stepping stone towards a stable future. Many of our loanees have completed multiple microfinance loans and then used both the prosperity and credit history created with their repayments to open bank accounts and be approved for more sizeable loans.

Around the world, average microfinance loans carry an interest rate of 26%. Wisconsin Microfinance loans charge 12%. We are able to keep that interest rate down for a variety of reasons: All employees are volunteers, allowing us to keep administrative costs at a minimum. The loan is not meant to have a monetary return for the donor, prioritizing progress over profits. And lastly, Wisconsin Microfinance only uses its trusted contacts on the ground, minimizing bureaucratic costs and the risk of embezzlement. Add to that a self-recycling loan pool, and you have a sustainable, low-cost source of capital for all those who want to break the cycle of poverty.