07/08/2008 05:12 am ET | Updated May 25, 2011

Economic Colonization: The Rich Profiting from the Poor is Not the Way to Handle Microfinance

I have recently received requests to better explain how microfinance, specifically microcredit loans to the poor, has also become a "good" business for the more well-off humans on this planet. The point, as Nobel Peace Prize winner, Prof. Muhammad Yunus argues, is not to always look at financial profits and dividends, but also social and human profits. In this case, loaning money to the poor, even if you are simply paid back what you invested (with no dividends and no interest) is a positive venture. In addition, that money can then be loaned out again to someone else, creating a positive snowball effect which has much more long lasting potential than does a charitable donation.

Microcredit is meant to help the poor start their own small entrepreneurial businesses which can help them send their children to school, feed themselves healthy meals, buy and build better homes, and empower people to continue this cycle which ends poverty. And bringing the majority of the world's population out of poverty is good for all of us, for future generations of humans. But it is not meant to make the wealthy even wealthier by profiting from the poor!

As microcredit has traditionally been linked to high interest rates (mostly due to the time and paperwork intensive rituals, in which the banker comes to the borrower, usually in a rural village), in these days of low rates for most big banks, with high defaults and general shakiness over the Western financial system in general, these high rates being paid in the developing world by loyal microcredit borrowers, look extremely appealing. Add to that the fact that these borrowers can actually be trusted to pay back at an up to 100% rate (usually somewhere between 97-98%). But these high rates being paid by the poorest of the poor are NOT meant to provide huge profits for wealthy people, especially when the funding for the microcredit comes from outside the poor country. That some (often Western-based) microfinance institutions are actually enforcing the payment of extremely high interest rates and then rewarding those who provide the loan capital with huge returns, is virtually stealing from the poor.

In Prof. Yunus' Grameen Bank system, created in Bangladesh, and being replicated around the world, the poor ARE the owners of the bank. Thus their high interest rates are being paid back to themselves, not to some rich guy in New York or London. Paying these wealthy people and investment funds high returns based on the ability of the poor to pay back is virtually the same thing as the World Bank "loaning" money to poor countries but then insisting that all of the equipment and trained workers and contracts are awarded back to the wealthy countries in the West. This kind of absurd system undermines sustainability! It does not help poor people and impoverished countries get out of the disturbing situation they find themselves in!

As the head of the Grameen Foundation, Alex Counts, recently said in Time magazine (June 2008), microcredit will need to be reinvented if this keeps up. What is most disturbing is that some of the individuals entering into this kind of profit-making microlending, are already extremely wealthy. It results in a new round of economic colonization and dominance of the wealthy countries over the poorest of the poor. Instead of empowering people who have been less fortunate, this system of providing loans, this new hyper-capitalistic microfinance, is even at times seen as some kind of philanthropic venture when it is doing exactly the opposite. What is the point of helping the poor build up small businesses, if it is only to eventually provide wealthy, Western-owned businesses and individuals with even a larger share of the world's wealth? In addition to that the rich believe they are doing a wonderful thing by "helping" the poor, when they are in fact acting like robber barrons.

It needs to stop. Quit patting yourself on the back for investing in microfinance that pays you a big return. Donate to reputable microfinance organizations such as the Grameen Foundation or Grameen America. Do your research before you donate! You should be paid nothing at all in terms of interest, and the capital you invest should be given as the way to begin a cycle which can help to create a sustainable solution to poverty.

The only way we are going to create a better world is by readjusting the horrific imbalances between rich and poor which are becoming more obvious today than ever before. It has to stop!
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