Warning of a crisis in microcredit

from the Financial Times

Muhammad Yunus warns of a crisis as big as the subprime credit crunch. He says that overseas investors should stop flooding money into microfinance. - Kale

By Tom Burgis in Johannesburg

“If you build it up that there’s a lot of money to make you can get a subprime kind of thing, but this time it’s the really poor people who will be in trouble,” Mr Yunus said in answer to a question from the Financial Times while speaking to reporters from a microfinance summit in Indonesia.

The gathering of microfinanciers announced a voluntary transparency drive under which willing institutions will submit details of the interest rates they charge on their loans. Mr Yunus’s Grameen Bank is the biggest of several lenders serving a total of 20m clients to commit to the scheme.

While comprehensive data are scarce, since its origins in Bangladesh 30 years ago, according to the most recent figures compiled by the Washington-based Microfinance Information Exchange (MIX) there were by 2006 at least 77m microfinance borrowers in 100 countries. JPMorgan calculated last year demand for financial services among poor people was worth as much as $300bn.

Loans are offered to groups who are unable to provide collateral, rendering them “unbankable” in the eyes of most traditional bankers.

Yet in recent years many of the world’s foremost financial institutions – among them Citigroup, Barclays, Morgan Stanley and BNP Paribas – have entered the fray, either by opening credit lines to microfinance institutions, taking equity stakes in them or creating funds that allow investors to gain exposure to the fast-growing field.

Outstanding wholesale loans from 17 leading international commercial lenders to microfinance institutions more than doubled to between $1.1bn and $1.4bn in the year to the end of 2007, according to a recent report commissioned by ING, the Dutch lender which itself has a microfinance presence.

That compares with MIX’s estimate of a gross loan portfolio held by some 1,100 major microfinanciers of $24bn.

Other commercial banks, including several in Africa, are moving downmarket to cater directly to clients once the sole preserve of microfinance.

The growing commercialisation of the sector was underscored last year when Compartamos of Mexico became the first microfinance lender to go to the market, with a $467m initial public offering – a move it defended as the only way to meet the huge demand that still goes untapped.

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