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Microfinance may be falling victim to its own success. Since starting in the 1970s, microfinance—the practice of providing financial services, particularly small loans, to the world's poorest—has grown rapidly worldwide.

Today, experts estimate there are 665 million client accounts at more than 3,000 financial institutions. About 188 million of these accounts are in India, while 27 million accounts are in Africa. Microfinance organizations are likewise diverse, from the multibillion-dollar Grameen Bank of Bangladesh to Christian groups such as Opportunity International, based near Chicago, and Kiva.org, which matches lenders and borrowers with loans that average $382. Microlending, savings, and insurance programs have been the darling of overseas poverty-fighting agencies.

Now scandals threaten to tarnish the reputation of these programs across the board. In Andhra Pradesh, a southeastern Indian coastal state, officials say 85 borrowers killed themselves because they could not repay high-interest loans. Some of these borrowers were pressured and harassed by collection agents.

In addition, some microfinance founders are suspected of exploiting the poor for quick profit. Last year, SKS Microfinance Ltd., also based in India, raised $350 million by becoming a for-profit, publicly traded corporation. The move made a few SKS executives and early investors very wealthy, which critics say undermines the poverty-fighting purpose of such programs.

The microfinance industry has attracted larger institutions interested in a quick buck, says Susy Cheston, senior director at World Vision, which operates Vision Fund with more than 600,000 borrowers in 40 countries. Vision Fund mostly operates through non-governmental organizations, ...

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In the Magazine

May 2011

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