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Is It Evil To Profit From The Poor?

The premise of microfinance is that poor people can be responsible borrowers but the financial system does not normally provide instruments that are matched to their extremely modest means. If the premise is correct, then the poor will be able to use their loans to good account, gaining access to capital in order to create more capital, however modest the scale.

An article from our Reuters source today raises the question of whether it's right for lenders and their investors to profit from very poor borrowers. The question in the headline asks whether such an enterprise is "profiting from poverty," thereby implying that might not be such a nice thing to do.It's an interesting question, given that the transaction facilitated by investment puts money in the hands of someone who would not normally have access to it, thereby immediately decreasing the poverty of the borrower, at least for the short term. Furthermore, the premise of microfinance is that poor people can be responsible borrowers but the financial system does not normally provide instruments that are matched to their extremely modest means. If the premise is correct, then the poor will be able to use their loans to good account, gaining access to capital in order to create more capital, however modest the scale of creation. As the article notes:

Microfinance has been around since the 1970s, but jumped into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh's Muhammad Yunus and his Grameen Bank, which pioneered giving tiny unsecured loans to the poor to buy cows or sewing machines.

The article also quotes Olivia Donnelly, executive director of non-profit U.K.-based Shiva Microfinance, who asserts that the job of microfinance is to alleviate poverty. "So the question to ask," Donnelly insists, "is who's going to benefit from the IPO?"

That is indeed the question, though I'm not sure how Donnelly would answer it. Perhaps she would be among those scandalized by the prospect of profiting from the poor. Should she be?

Sometimes one must state the obvious when powerful sentiments get in the way of common sense. Economies run on profit: individuals and corporations are motivated to contribute labor and capital in order to end up better off than they were before. One might think it would be nice to provide a given product to the marketplace, but that generally isn't enough to provide for the demands of the marketplace. If one is not to profit from the poor, then the poor should never have to pay the market price of any commodity. But if goods can only be sold to a large market at cost, surely far fewer goods will be supplied to that market. Who does that help? If the microfinance market is sufficiently robust, then capital must be found to supply it, and that will require the motivation of profit. If viable loans can be designed, then both lenders and borrowers will be better off - and Ms. Donnelly's question will be satisfactorily answered.

A similar question was raised often during the healthcare reform debate: should insurance companies profit from people's medical care? Few asked whether medical device companies or pharmaceutical companies should profit, or whether surgeons should be paid like police officers, but leave that aside. Surely the right question is whether employer customers, individual policyholders and the general public in aggregate benefits from the infusion of private capital into the health insurance market. But such reasoning is unfortunately a bridge too far in the sensationalist, demagogic world of politics.

Reasonable concerns about for-profit microfinance should be taken into account, such as those that Donnelly expresses later in the article, about having proper regulations and accountability to ensure that lenders don't pursue their interests through practices likely to lead to more rather than less poverty. However, if poor people can benefit from private capital in the microfinance market, then we should be enthusiastic about events such as the SKS Microfinance IPO.The premise of microfinance is that poor people can be responsible borrowers but the financial system does not normally provide instruments that are matched to their extremely modest means. If the premise is correct, then the poor will be able to use their loans to good account, gaining access to capital in order to create more capital, however modest the scale.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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