The Scam of Microcredit Pt. 2

This chart is from mises.org, "showing that the much-praised Grameen Bank is a highly subsidized, unprofitable, and unsustainable institution."

Previous posts on this topic: http://nastybrutishandtall.com/2006/11/scam-of-microcredit.html

The Scam of Microcredit

All the statistics that come with the articles praising Nobel Prize winner and Grameen Bank founder Muhammad Yunus seem too good to be true. Frankly, they never passed the smell test. Here are some of the fantastic figures that have been frequently quoted:

-Grammen Bank has lent $5.7 billion to over 6.1 million borrowers (an average of $934 a borrower)

-The default rate is around 1% !!

-100 million people are expected to participate by the end of this year

And you thought ARMs were shaky? Grameen bank does not require collateral or loan guarantees. How is it possible that this guy could out-maneuver real banks and get a 6 million customer base with a nearly 100% payment rate? If that were the case, seemingly it would mean that large banks, the most sophisticated analyzers of credit in world, missed a massive profit opportunity and a huge growing market.

An article in Forbes sheds some light on the scam. Some of the highlights:

-No one has made any profits

-There are no studies that look at the success or failure of the businesses that are being funded

-There are no stats on the long term repayment rates. In other words, the low default rate is fiction since the banks have no idea how stale the loans are.

So why is this initiative still being funded?

...the microcredit bubble is being inflated by government rules that all but force lenders to keep pumping out microloans. New Delhi requires banks to devote 40% of the money they lend to a category of borrowers that includes small enterprises, with about half of that going to rural outfits. Banks have long struggled to meet this obligation, and lending to microcredit institutions that then lend to the groups of women offers an easy way to do it.

You have to pay to play but at least you get to brag that it was charitable. Of course there are no profits in an industry created by gov’t (read taxpayer) money. Same old bureaucracy scam as welfare, the bureaucrats and politically connected middlemen get rich under the guise of the greater good while the underlying causes of poverty never change.