Saturday, December 15, 2007

Business Week attacks Microlending in Mexico

Business Week has devoted significant space to a Keith Epstein and Geri Smith article that attacks "The Ugly Side of Microlending."

Microlending has received a great deal of attention recently, most of it positive, as it has enabled poor entrepeneurs in developing countries to generate income and even build real wealth.

However, Epstein and Smith highlight the predatory nature of Latin American microlending. They focus on Banco Azteca, a fast-growing Latin American bank generating "a torrent of revenue" from microlending in Mexico. In addition, Banamex (Citigroup) and HSBC are angling in on the action.

[The poor] will pay interest rates most Americans would consider outrageous, if not usurious... With no legal limits on interest levels and little government oversight, for-profit banks in Mexico impose annual interest rates on poor borrowers that typically range from 50% to 120%. That compares with a worldwide average of 31% among nonprofit micro-lending institutions, and the 22% to 29% that Americans with bad credit histories incur on credit-card debt.

What is interesting about the article is that while hammering Mexican microlending, Epstein and Smith completely ignore the obvious analogy of payday loans in the U.S.

The scourge of Payday Loans

What is a "Payday Loan"?

Borrowers visit a payday lending store and secure a small cash loan, usually in the range of $100 to $500 with payment in full due at the borrower's next paycheck (usually a two week term). Finance charges on payday loans are typically in the range of $15 to $30 per $100 borrowed for the two-week period, which translates to rates ranging from 390 percent to 780 percent when expressed as an annual percentage rate (APR)[4]. The borrower writes a check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower doesn't repay the loan in person, the lender may process the check traditionally or through electronic withdrawal from the borrower's checking account...

I thought usury and loan-sharking were both illegal, but that's apparently not the case.

...most states have usury laws which forbid interest rates in excess of a certain APR. Payday lenders have succeeded in getting around usury laws in some states by forming relationships with banks chartered in a different state with no usury ceiling (such as South Dakota or Delaware). This practice has been referred to as "Rate exportation", the "agency model" and the "rent-a-bank" model...

Put simply, payday loans appear far more exploitive than the practice of microlending. That Epstein and Smith ignore this simple comparison is at best puzzling, but more likely indicative of an unspoken agenda.

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