PROVO — Warner Woodworth worries that in some parts of the world, microfinancing groups are turning into something they were supposed to combat: loan sharks.
The BYU professor, who has been teaching a class on microfinancing for over a decade, says this is evident in places like southern India where microfinancing is in a crisis state.
There, people have been taking out more loans then they can handle, forcing them to borrow even more to pay off mounting debt. Last month, dozens of farmers in southeast India reportedly committed suicide due to crushing debt, which prompted government officials there to lay down stricter microfinancing laws.
But Woodworth believes the crisis could have been avoided had microfinancing organizations not lost sight of why microloans were invented in the first place, which was to help the poor who have trouble borrowing at low interest rates. They turned from non-profit to profit, finding for-profit microfinancing, in some instances, quite lucrative.
In the past decade, Woodworth said, for-profit microfinancing has become "the rage." But turning to this business model made many of these institutions focus more on growth than on helping the poor.
Companies are upping their interest rates, financing riskier loans and becoming more forceful in debt collection. They are also offering less training to loan officers.
"We started micro-financing to counter loan sharks, but now we have come full circle," Woodworth said.
But Woodworth says because of the money people are making off of microfinancing ("off of the poor," he says), he is afraid more organizations in the U.S. will turn to for-profit microfinancing, perhaps even in Utah, he says.
The largest microfinancing organization in Utah, Utah Micro Enterprise Loan Fund, which has given out hundreds of loans over the last 17 years in nine counties in the state, is not contemplating such a change.
"If these loans were always profitable, banks would do them," said Kathy Ricci, executive director of UMLF. "There are too many risks associated with it. I don't see it as profitable."
Part of the reason is that unlike for-profit microfinancing institutions, Ricci's organization is keeping interest rates between 8 to 10 percent, which is what traditional microfinancing organizations try to do. Like for-profit microfinancing institutions, though, UMLF gives out more pricey loans than would traditional third world micro-enterprises. UMLF's minimum loan starts at $1,000 and goes up to $25,000 (and the company is hoping to get approval to give out as much as $35,000 soon).
While some microfinancing companies do business training before deciding whether to give out a loan to a person or not, UMLF is just focused on giving loans out.
But before they decide to give out a loan, they also get to know the individuals by holding a meeting with them to go over their business plan.
She said that because of the economy some of her clients have had trouble paying back their loans. Instead of using scare tactics to get the money out of them, her organization has extended the time to pay back loans and lowered the amount of money owed per pay cycle for those clients.
She said during the recession the payback rate has gone from 90 percent to 83 percent.
But other microfinancing institutions in Utah have been hit even harder during the recession. MicroBusiness Mentors, an all-volunteer microfinancing organization run mostly by BYU students and based in Provo, said their payback rate during the recession has dropped about 30 percent.
"The economy is wreaking havoc on the poorest of the poor," said Woodworth, who helped MicroBusiness Mentors start up.
Keven Stratton, manager of MicroBusiness Mentors, said the organization gives out smaller loans, on average between $500 and $2000. They hold 9-week business classes and then have the clients present their business models before they decide whether to give out a loan.
They also have mentors that follow-up with the individuals who were given the loans to help their businesses continue to grow. But Stratton said because of the low percentage of payback rate currently, the organization will be changing its model soon.
"We have tried to make the process as uncomplicated as possible, but I'm not sure that is the best way to do it," Stratton said. "We want to make sure the loans are a blessing and not a curse."
One thing they are looking at doing is giving out what are called group loans, where each member of a group takes out a personal loan but collectively the group bears the burden of the repayment. For instance, if one person gets sick and can't go to work for a couple of days and falls behind, the other members of the group will help pay what he can't that month. Then the next month, he will try to pay back his share.
Woodworth said at least in other countries social contracts are often more successful than individual contracts.
There are many skeptics who don't think this model could work in the U.S. (as it is mainly done in third world countries).
But Grameen Bank, who pioneered microfinancing in the 70s, recently started a pilot project of group loans in New York City and has had a 100 percent payback rate so far, said Woodworth, who has followed the pilot program closely and is friends with the owner.
Woodworth said the fight will continue though between the welfarists, who believe that donations will sustain microfinancing, and the institutionalists, who have turned these type of organizations into profit businesses.
"NGOs have to be focused on serving the poor not in making money," Woodworth said. "I don't think you can do both. You can't serve God and mammon."
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