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Fighting fire with fire

AMID the furore over
loansharks imprisoning
borrowers in apartments
to enforce repayment and
the subsequent clamour
for tough government
action against these
callous moneylenders,
three popular myths
need to be debunked.
Myth No 1 – A high
proportion of those who MakingSens
borrow from loansharks
are gamblers. This by Tan Siok Choo
statement is unlikely to
be true. Gamblers almost always
default on their loans. If loansharks
lent mainly to gamblers, their non-
performing loans (NPL) would be
unsustainably high and they would
soon go out of business.
That loansharking is a thriving
business suggests most borrow-
ers are non-gamblers with a good
record of repayment.
Myth No 2 – To curb
loansharks, the govern-
ment should prosecute
moneylenders and reduce
significantly the number of
moneylenders.
Moneylenders who
resort to violence should be
prosecuted under relevant
criminal and civil laws and this
should be done quickly and consist-
ently. But jailing loansharks could
shrink the number of moneylenders
without addressing the fundamental
problem of demand.
private equity groups. This profit-making stance has been
Sequoia Capital, a venture harshly criticised by Muhmmad Yu-
capital firm that funded Google’s nus, the economist and Nobel Prize
startup, has invested US$11 million winner who founded Grameen
(RM38.5 million) in SKS Microfi- Bank in Bangladesh in 1976.
nance, the largest MFI in India. In However, Gil Crawford disagrees
2007, Helios Investors, a UK-based with Yunus. Crawford, the chief
private equity firm, paid US$175 executive of Microvest, a US-based
Despite exorbitant The phenomenal growth of million (RM613 million) for a 25% fund manager with US$70 million
interest rates charged microfinance institutions (MFIs) stake in Equity Bank, a Kenyan MFI (RM245 million) in microfinance
by loansharks and suggests otherwise. MFIs lend eager to expand and challenge big- in its portfolio, argues the alterna-
despite widespread small sums of money to individuals ger banks. tive will force potential borrowers
publicity about their to start profitable businesses. Prop- Banco Compartamos, a profita- to turn to loansharks who charge
tendency to use erly run, the rate of NPLs is very ble MFI in Mexico, adopted another even higher interest rates.
violence, that many low and some MFIs are highly Providing more capital for
individuals continue to profitable. MFIs also helps to foster greater
patronise loansharks In Malaysia, the most no- competition, Crawford says. In
suggests there is strong table MFI is Amanah Ikhtiar Bolivia, competition has caused
demand for fuss-free, Malaysia (AIM). Under Budget lending rates to fall from 100%
unsecured personal 2009, AIM will be disbursing to less than 30%, he points out.
loans. RM500 million this year to Investing in MFIs can be
Jailing loansharks those earning RM1,500 or less. profitable. Crawford says his
will reduce supply In 1997, 618 MFIs had 13.5 first fund exceeded expecta-
without impacting demand. This million customers worldwide. tions by earning a 20% return
phenomenon is evident in another Ten years later, the number last year.
sphere – drug busts. Whenever the had ballooned to more than “Oftentimes, microfinance
police confiscate a huge cache of 3,000 institutions serving 154.8 companies’ returns on equity
illegal drugs, inevitably, the street million customers with an es- are higher than in the banking
prices of these illegal drugs esca- timated US$30 billion (RM105 system,” says Robert Annibale,
late. billion) in outstanding loans, Citigroup’s London-based head
This doesn’t mean the govern- the Consultative Group to As- of microfinance.
ment shouldn’t prosecute loan- sist the Poor, a World Bank unit In short, encouraging the
sharks. What it needs to do is adopt that tracks and assists MFIs, growth of more MFIs to pro-
says. vide greater competition to
A major challenge MFIs loansharks rather than jailing
Oftentimes, microfinance face is funding. Because them is a better solution to the
companies’ returns on equity are most MFIs don’t accept deposits, route. In April 2007, it raised US$467 fundamental issue – the lack of fuss-
higher than in the banking system,” the traditional source of capital million (RM1.6 billion) in a partial free unsecured small loans that will
is donations from individuals, initial public offering (IPO) that val- enable the poor in this country to
- Robert Annibale, Citigroup’s London-based philanthropic institutions and ued the MFI at a staggering US$1.5 improve their businesses.
head of microfinance. governments. But donations billion (RM5.3 billion). From 61,000
can’t keep pace with demand clients in 2000, Compartamos now Opinions expressed in this article
a two-track approach – enforcement for microfinance. has 1.2 million active clients and its are the personal views of the writer
and greater competition. Recently, MFIs have begun to rate of NPLs is just 1.9%. and should not be attributed to any
Myth No 3 – Making loans with- attract attention from some main- Compartamos’s success stems organisation or financial institution
out collateral is a losing business stream banks like US-based Citi- from the fact it charges an interest she is connected with. She can be
because the rate of repayment is group, France’s Societe Generale, rate that generates a profit – some- contacted at siokchoo.nsamail@
low. Germany’s Deutsche Bank and times 100% interest on some loans. gmail.com.