Microfinance and credit cards

Got an email from the Grameen Foundation giving anecdotal evidence for the wonders of microfinance, “It was a beautiful mid-June day for the two-hour drive to the rural village of Gashora, Rwanda…”

How is microfinance different from mailing credit cards to people who can ill afford paying credit card interest rates?

On the Grameen Foundation website we are informed that “MFI [Microfinance Institutions] interest rates can range from 15 to 35 percent, depending on the conditions in each MFI’s service area.”

Some people will invariably overextend themselves. Is it ethical to make money off poor people who have been given access to credit, if their ventures fail?

Islamic finance bans interest, and the lender can either take an equity stake in the venture, or, under profit and loss sharing, take all the responsibility for any losses. The lender therefore has a strong incentive not to induce the borrower to overextend herself.

Providing credit for poor people is good, but providing microfinance based on Islamic finance principles would be better.

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3 thoughts on “Microfinance and credit cards

  1. May I suggest a few hours at
    http://www.microfinancegateway.org/
    might help answer some of the questions
    you raise.
    Certainly credit can lead to problems.
    But the misuse of anything can.
    The people I have read and heard who
    have seen the changes in the lives
    of people who use their microcredit
    loans to improve their businesses
    strongly favor microcredit.
    Perhaps if you looked more closely,
    you would too.
    John

  2. If effective cash flow analysis is conducted, and appropriate incentives are created then risk mitigation becomes less of an issue for MFIs and others provisioning credit. Have a close look at the Microenterprise Access to Banking Services (MABS) program (www.rbapmabs.org), as it seeks to address many of these concerns for more than 80 rural banks in the Philippines. There is an inherent risk in any commerical enterprise, but with accurate risk assessment on both the client and lender side, this can and is reduced effectively impacting livelihoods and significantly reducing poverty in rural/poor communities.

  3. Both are good if it they are utilized appropriately. It is understandable that the lenders (for both credit cards and microfinance) expect to make money but if the creditor knows how to handle his finances, knows what he’s getting into when he decided to take the plunge, he can use it to his advantage. There are small business starter credit cards that can be accessed online and I agree that it is the perfect credit card for those who are down on their luck and wants to get back on their feet.

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