Why worry now this? For two reasons. The first is that the recent crisis that micro finance system in a state of India can spread to the rest of the world and especially Latin America. When you see your neighbor's beard burn, put yours to soak. And the other is because this crisis teaches us lessons for accountability office of financial institutions in general and businesses in particular.
The crisis in the state of Andhra Pradesh in India is emerging as a result of some customers could not pay the high rates of interest on loans which led many families to ruin and disgrace and, in some cases, suicide. This situation was unfortunately exacerbated by opportunistic politicians who suggested not paying the loans until they fix the situation. By interrupting the flow to the microfinance has closed the renewal of credit, business critical link, and opened a vicious circle virulent. Much of the high interest rates due to high transaction costs in very small loans with direct supervision intensity. However, some of these high rates is due to the quasi-monopoly power of some financial. The fact that one of them was the capital market with a share issue that made millionaires of some of its shareholders, damaged the public image of these institutions. An issue of corporate responsibility.
there was a case in Latin America, which fortunately did not reach higher. Apart from isolated protests by some experts in the field, there was no reaction of customers or politicians. Was the case of microfinance, with a large market position Urban was a monopoly, charging interest rates in excess of 100 percent, even with minimal delinquency, with more than 600,000 customers. Its return on equity exceeded 50 percent, when traditional banks did not exceed 10 percent. The owners decided to go to the Stock Exchange, to raise capital and expand its coverage, but to sell 30 percent of their shares converted into cash and accounting earnings. The issuance was an over-subscription of 12 times. The original contributions of capital of U.S. $ 6 million had become $ 125 million in book value through profit accounting, and became U.S. $ 1,500 million through the assessment in the bag. The shareholders had a yield of 100% compounded annually during each of the seven years of the existence of financial. All thanks to higher interest rates to 100 by the way the poor pay. Who paid for these extraordinary profits for shareholders?
Legal "? YES, Ethics? NO. Not that I have nothing wrong with making money legally, but there are ways and ways. The broadcast was aimed at capturing the high value of the microfinance market, under the expectation of gains, based on high interest rates. But what they charged was not illegal and unregulated. It has always been argued, correctly, that control of interest rates would deprive severely credit. But what about social responsibility where it is? Apparently it was enough for developers to engage in microcredit, it fulfilled its work to society. This was a great missed opportunity to create, with some of the perks, a Foundation for financial education of microentrepreneurs. And obviously voluntarily reduce interest rates.
addition to the traditional responsibilities of any company, what are the specific responsibilities to microfinance? In fact the vast majority are common with any financial institution only more intense, more social, more cohesive. These must be tailored to the market they cover, which is usually very competitive and very few customers with financial expertise. Only enumerate these special responsibilities not to extend:
• Provide funding that the customer needs and the customer only needs
• As the client does not usually know what you need, you have to give financial education in the demand resources and responsible use.
• And the most important responsibility, reduce borrowing costs through the efficiency of financial intermediation by:
- Collection Low cost : financial risk control and portfolio mix of funding, good governance, accountability (ethics and transparency), compliance reporting objectives (client monitoring and aggregation)
- intermediation margins Netherlands: Efficiency management, technology applications, selection and customer support, management of liquidity.
- effective placement: for maximum recovery
But MFIs have concerned the impact of transaction costs have on their clients or simply passed on these higher costs? MFIs will say that it is problem competitive market in which they operate. But the market is not competitive, with all that you mean. The poor client (in the broad sense of the word) has no knowledge of finance, is not sophisticated enough to go from financial financial to see who gives better conditions. Do you know how to distinguish which are the best conditions? And if he does find out, do not worry, financials will take care of so they do not complicate it.
The fact provide a service that supposedly helps improve the quality of life of the population, that supposedly helps reduce poverty (in fact not yet proven) not allowed to ignore the responsibility of your product / service and the price at which the product sells
The competitive market for microfinance is still a fallacy in most developing countries. Its regulation is relatively weak, and when there is a regulation more closely linked to the stability of the system to protect the consumer.
But it also leaves us important lessons for financial and nonfinancial companies. Many of the problems of MFIs are due to irresponsibility on the product / service they sell and the price at which they sell. In business in general, those who care about social responsibility, care of the traditional typology of tasks: environment, good governance, human resources policies, community support, etc..
But the responsibility for the product and its price does not receive much attention. In the case of obviously harmful products, but for which there is great demand (snuff, alcohol, etc..), The onus on governments to regulate their production and consumption, and largely the same companies, who have to care the goose that lays the golden eggs and not lose the business. But there are many products whose consumption is left to the "regulation" of the consumer, often ignorant of the subject. Bracelets have seen miraculous creams that reverse aging, slimming shoes and reduce cellulite pills and lift it all at full power. Product liability is a relatively ignored by the guards of CSR.
And not to mention price. Prices are also supposedly "regulated" by competitive markets. Under the assumption that there are many manufacturers that produce similar products, not necessary that the company implements its responsibility to be fair prices. The market does. But this depends on an assumption in the functioning of competitive markets, which as in the case of microcredit, is rarely respected. And is the availability of information and the consumer's ability to act on it.
And we are not proposing price controls, we are proposing a better functioning of markets where they exist, via more and better consumer information and education
microfinance This case illustrates the responsibility that companies should have two areas that CSR watchers often assume that others ignore or cover them: the responsibility of the product and its price. In these respects we are a little late.
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