Can Microlending Survive Microloan Scams?

Given microlending's potential to finance small business owners and build the economy, it's a shame that some unethical folks are using microloans as a way to scam people and institutions out of their money. Is it possible for microlending to survive microloan scams?

Micro lending gives entrepreneurs an important financing alternative.

But in recent years, micro lending has also seen its share of scams and controversies. Although would be unfair to paint the entire micro-lending industry with the same brush, there have been enough issues to question whether or not microfinance can remain viable.

While microlending is not likely to disappear it will probably undergo reforms in the years ahead. As microfinance organizations increase their loan volumes, it seems clear that additional oversight will be required in for-profit and nonprofit organizations that participate in microlending activities.

The following three examples illustrate why closer scrutiny is necessary and how fraud can easily make its way into any microlending organization.

BancoAzteca (Mexico City)

Since the 1970s micro lending has been a tool for nonprofit economic development. In the decades since, there's been a subtle shift in some organizations toward viewing microloans as profit centers. BancoAzteca is representative of a growing list of banks in Mexico and around the world that are making microloans with exorbitantly high interest rates. BancoAztec typically charges interest rates ranging from 50% to 120%. In order to maintain their reputation in the community, microloan borrowers go to extraordinary lengths to make their ridiculously high payments. Although healthy interest rates are often necessary to maintain microfinance programs, BancoAzteca is clearly taking advantage of Mexico's unregulated banking system to exploit their microloan borrowers.

Partners for Small Business Development (Philadelphia, PA)

In April 2009, it was reported that a woman who led a nonprofit called "Partners for Small Business Development" stole $650,000 from lenders and borrowers. As part of the organization's mission, the woman developed a microlending fund with a consortium of local banks. The organization then facilitated loans to small businesses in the amount of $30,000 or less. Subsequently, the business became the conduit between banks and small business borrowers. This made it easy for the woman to abscond with funds for her personal use and to file false loan documents. If the loans had been made through a traditional lending arrangement, there would have been oversight mechanisms in place to red flag the fraudulent activity much earlier.

Kiva (Abidjan, Cote d'Ivoire)

Kiva is one of the most respected names in microlending. Yet even they fell victim to a scam in 2008 when a field partner was caught making excessive and fraudulent microloans. Fortunately, Kiva had the infrastructure to quickly deal with the issue. But Kiva's experience underscores the potential for fraud that exists even in respected microfinancing organizations.

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