Banks Making Big Profits From Tiny Loans

According to an article by the New York Times, micro-loaning, the widely acclaimed process of alleviating poverty cheaply, might be largely ineffective. Ironically, the practice's popularity might be the result of its downfall. An increasing number of large banks and financial institutions have been attracted to the lucrative profits accompanying even the smallest loans, and their presence has hurt the chances of an individual escaping the cycle of poverty. Their dominance has led to skyrocketing interest rates, with some institutions charging 100 percent or more. The practice of profiting off of the misfortunes of those in poverty has received considerable scorn from the people who were initially the biggest proponents of micro-loaning.

"We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks," Muhammad Yunus, the economist who pioneered mic
ro-loaning, said. "Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people."

The looming questions about the practice of micro-loaning are how much interest and profit is acceptable, and what constitutes exploitation. For countries such as Mexico and Nigeria, who are largely impoverished, the answers are particularly important. Though interest rates vary globally, the largest sense of worry concerns these countries, as the demand for small loans by a large population cannot be met by existing lenders. In Nigeria, one lender in particular has raised questions and caused considerable concern-- Lift Above Poverty Organization. LAPO is considered to be the premier micro-finance institution in Nigeria, and engages in the contentious practice of "forced savings". This practice allows the lender to keep a portion of a loan, but the borrower is still required to pay interest for a full loan. Critics of this exercise claim that it is exploitative, as the borrower does not receive the full amount upfront. The appearance of the "forced savings" practice is further degraded by the fact that it is technically illegal. Yet, countless numbers of poor individuals fall prey to its claims of brighter futures that fail to emerge.

The decline of the effectiveness of micro-loaning has dire consequences for Nigeria as well as the world as a whole. The greed of a selective group of financial institutions has the ability to perpetuate the poverty of an entire class of Nigerians. This problem is also a common policy issue, as the welfare of the nation and the degree of poverty is reliant upon the micro-lenders. There is also significant lack of transparency in these institutions, which could possibly result in corruption and mishandling of loans. If the loans continue to be ineffective at elevating individuals from poverty, it is entirely possible that the situation might accentuate the economic disparity in Nigeria.

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