The Dark Side of Microfinance
We visit a small city in Mexico to get the real story on how newly available—and extremely
expensive—credit affects the lives of the working poor By Keith Epstein and Geri Smith From Mongolia to Mexico, big financial players are pursuing profits from an unlikely set of customers:
the world's poor. By putting personal loans within reach of the working poor, or by investing in the business, players such as Citigroup (C) and HSBC (HBC), as well as investors as varied as Deutsche Bank (DB) and U.S. pension colossus TIAA-CREF say they are helping both low-income societies and their own bottom lines.
In Mexico, the government eagerly embraces the race to extend financial services to the poor, offering a climate little fettered by regulation. There are no limits on interestrates, which often soar to levels above 100%. There is no tradition of consumer protection. The result, while thrilling for investors, can be devastating for some customers, a BusinessWeek investigation has found.
Banco Compartamos (BMOSF), a onetime philanthropic nonprofit founded by a devout Catholic inspired by Mother Teresa, is Latin America's most profitable and swiftly growing bank. Banco Azteca, started by a well-known specialty retailer, has exceeded its own executives' expectations in only five years of existence. Now even Wal-Mart (WMT) has a banking license.
For the poor, such access to once-unattainable goods and services creates long-awaited opportunities. While lenders deny employing high-pressure sales tactics, and point out that consumers are free to choose what products and services to buy or avoid, temptations of theemerging credit economy also draw many unsophisticated families into a maze of debts they barely understand and from which they may never free themselves.
For a closer look at the impact at Mexico's new credit economy on the poor, BusinessWeek zeroed in on San Martin Texmelucan, (pop. 143,000), two hours southeast of Mexico City. San Martin is a bustling web of avenues, primitive cinder-block dwellings and dirt alleys choked with dust and exhaust fumes in the shadow of snow-capped volcanoes once revered by the Aztecs. |
NEWS RECORD
The Dark Side of microfinance
We visit a small city in Mexico to get the real story on how newly available—and extremely expensive—credit affects the lives of the working poor
