The first ever major controversy surrounding Microfinance seems to have gained steam with Muhamma Yunus, the Nobel laureate, openly challenging Carols of Compartamos bank. The debate is over whether the capitalist or the socialist approach is the right model in the step to alleviate poverty.

Compartamos (which means "Let's share" in Spanish) a prominent Mexican MFI is charged with exploiting the poor with their loans that carry an exorbitant annual interest rate of 100%. While the founders of the MFI claim that such lending rates are necessary in the wake of high cost of capital, and needed to cover the high operational costs of lending and maintaining lower denomination loans, one wonders how this lending rate is almost thrice that of other MFIs.

The Nobel laureate who pioneered the Microcredit movement three decades back challenges this model and dismisses this as a model that would eventually be a thing of past just as money-lenders have faded away. But then I wonder why the borrower still flocks to Compartamos if he/she thought he/she was being exploited. Is it lack of other cheaper borrowing options? If so then why don't we see likes of Grameen bank, who consider microcredit as a philosophy and not look at it with just the financial bottom-line, lending at lower interest rates in Mexico?

At the risk of sounding a socialist, I second the Grameen school of thought. I see MFIs as social enterprises and not just a traditional for-profit firm going by willingness-to-pay. In my opinion, this defeats the very purpose of microcredit. On one hand while I believe in market forces and existence of invisible hands, I fail to see how this is the right approach to lift oneself out of poverty.

Catch a glimpse of this debate on PBS Video. You may also want to peruse on the two distinct school of thoughts here.

~ Santosh



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