By Neal Erickson
Internationally, microlending has been lauded as a tremendous benefit for the working poor. In Bangladesh a man named Mohammad Yunus founded the Grameen Bank in 1983, and in 2006 was awarded the Nobel Peace Prize for his work making fair priced loans available to poor working people. The Grameen Bank has been an inspiration to like-minded people around the world.
In Mexico, there have been numerous organizations formed to bring this benefit to the people (see Alvin Starkman’s article on Fundación en Via in this issue), and have a seemingly endless list of success stories of those who have used small amounts of borrowed money to make large advances in their lives. However some corporations have entered this market, and because of lack of government regulations or laws limiting excesses, have built extremely efficient, and some say obscenely profitable business models. One of the most visible of these, but not by any means the only, is Elektra/Banco Azteca.
If an individual with a modest income were to seek a loan in the U.S., Canada, or most of the rest of the developed world, he would do so under the assumption that he was relatively safe from tricks and unfair interest rates. By law lenders must follow regulations including full disclosure of costs, interest/principal balance in each payment scheduled, and the interest be must continually calculated on the decreasing balance through the life of the loan, and represented as an accurate “annual percentage rate”. Essentially none of these are law in Mexico.
A small loan to a working Mexican can be represented as a 1% interest loan, but if the interest is collected weekly at 1% and the decreasing balance of principal is not considered, at the end of 52 weeks of payments, the borrower has actually paid 52% interest on his loan. This is a simple example, but by no means a worst-case scenario of loans being made every day. This example doesn’t even account for the fact that there is a 15% tax on loans in Mexico, which is usually factored in and deducted from the loan amount turned over to the buyer. All legal in Mexico, all criminal in most developed countries, and a lender would lose his license to operate if he practiced business this way.
Arguments can certainly be made about the higher risks engendered when loaning to low-income first-time borrowers. However Banco Azteca has developed a business model that vastly reduces those risks and the subsequent exposure to losses. They have teams of collection agents, most on scooters or motorcycles, which establish and maintain contact regularly with borrowers. Aided with cutting-edge electronic equipment, the agents are there almost immediately if there is a missed payment, and the loan agreements include lists of the borrowers’ appliances (at depreciated values) and serial numbers which are incorporated into the loan agreements as collateral. If there is a default, regardless of hardship, the listed items are repossessed and resold at one of the chain of Elektra used equipment stores, effectively paying off the loan. Loan default rates are surprisingly low. Critics of these lenders primarily object to the lack of transparency in presentation, and the interest rates charged, which have led to enormous profits.
Borrowers seeking loans in this “micro” category are very often minimally educated and lack worldly experience. If the government of Mexico were to look closely at the growing list of microlending corporations (now including WalMart de Mexico) and their overall lending practices, they may see that there is a need for change in regulations for the sake of the citizens that depend on them. Profits are excellent, but excessive profits can sometimes indicate injustice.