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23 January 2008

Micro-finance- the other side

With the increasing in interest in the topic especially after the award of the Nobel Prize to the Grameen bank founder, it is interesting to note the other side too.

The Business Week in its report called, The Ugly Side of Microlending-How big Mexican banks profit as many poor borrowers get trapped in a maze of debt, says;

'For three decades, micro-lending was seen as a tool of nonprofit economic development. Now poor people are turning into one of the world's least likely sources of untapped profit, primarily because they will pay interest rates most Americans would consider outrageous, if not usurious.

With no legal limits on interest levels and little government oversight, for-profit banks in Mexico impose annual interest rates on poor borrowers that typically range from 50% to 120%. That compares with a worldwide average of 31% among nonprofit micro-lending institutions, and the 22% to 29% that Americans with bad credit histories incur on credit-card debt.

Azteca's business model succeeds not only because it can charge credit-starved clients almost whatever it wants. Equally important is that low-income Mexicans anxious about maintaining their reputation tend to pay back what they owe, regardless of the hardship. Those who slip behind receive frequent visits from motorcycle-riding collection agents. '

Quite significant for India too I would think. Full story and reader comments here.

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