Microfinance Practice: Re: [MFP] Microfinance's position

Where's the competition? It is certainly there. But the fundamental problem is that we all assume standard business practice applies to microfinance. We say "If supply doesn't meet demand, prices are high and profit is high. High profits draw in more supply, and increased competition drives down prices and drives down profits."

Here is what really happened in Mexico:

* There were only a few MFIs. They charged high prices, but nobody knew their prices, because the prices are confusing and transparent.

* A few of the MFIs get obscenely rich. And by "MFIs" I mean here businesses lending to poor people. The most notable one is a "true MFI" - Compartamos

* There are now 3,000 businesses lending to the poor. Supply of loans increased dramatically.

* What drives down prices in any other product is price competition. Price competition happens when the consumer can compare prices side-by-side. I go to the grocery store, I know milk cost $x per liter in one grocery store, and $y per liter here.

* Loan prices are mind-bogglingly confusing. The client gets lied to. So to "compare products", the client says "How big a loan can I get, and how fast…. and what would my weekly payment be?" They compare the weekly payment to their cash flow and decide if it is affordable. This isn't text book price competition.

* Thus, prices stay high. Profits stay high. Increased supply just means that the poor, who never could find a loan, now have 3, 4, or 5 loans.

* So the typical poor person in Mexico is way over-indebted. All the loans at over 100% APR. They time the disbursement of the 5th loan to manage payments of loans 1 and 3. They juggle as long as they can.

* As long as the juggling continues, the profits keep rolling in.

* And the lenders keep pushing more loans on clients they *know* are already juggling multiple loans.

* You might say "That doesn't make sense". I agree. But they've always called predatory lenders "loan sharks". When sharks smell blood, they lose all restraint and go in for the kill. What is happening in Mexico is comparable to a shark feeding-frenzy.

South Africa has over 1,000 payday lenders. Same thing happening there.

Chuck Waterfield

On Sep 13, 2014, at 4:42 AM, Hugh Allen hugh@vsla.net [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Good for you Chuck. You can't plead high costs while posting these disgusting returns. But he did make one valid point. Where is the competition if it's such a gravy train?
On 12 Sep 2014 19:14, "'Chuck Waterfield' waterfield@microfin.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:

I'm reaching the decision that I'm wrong on something I believe passionately about.

I believe the microfinance industry needs to stake out a clear position that we do not make excessive profits off of the poor, that we do not charge usurious rates to the poor. Others do that, and they have that choice. But to me, responsible practice means we restrain ourselves and make no more than moderate profits.

I've been saying that over and over for 7 years. But the industry disagrees. We still do not have a good definition of "responsible price" and we do not have any industry position on responsible profit vs. profiteering.

Last month, Compartamos became the 22nd MFI in the world to be certified as meeting the SMART principles, despite prices of 105% and profits of US$1M a day.

I made my case last week, at the Micro Credit Summit in Mexico. My views are summarized in this article by NextBillion:

http://www.nextbillion.net/blogpost.aspx?blogid=4057

I have recorded my position in this 15-minute video here:

http://www.mftransparency.org/making-markets-safe-vulnerable-good-intentions-concret-actions/

I know there are many people who share my views. But we are outvoted. (Oh there are no votes taken on these positions.)

Self-regulation has a serious risk of really being self-interested regulation. Until open debate and objective decision-making takes place, I see no change possible. But what open forum is there for debate and decision-making on these topics? I certainly haven't seen one.

So maybe I'm wrong on all of this. But without discussion and debate, I can't be convinced that I'm wrong.

Chuck Waterfield