Microfinance has been hailed as an effective way to fight poverty, but as more banks enter the industry looking to make a profit, are microloans simply trapping more people in debt? Duncan Duke, assistant professor of management in Ithaca College’s School of Business, is conducting research in northern Mexico in hopes of shedding light on the answer.
Modern microfinance – the practice of lending small amounts of money without collateral to groups of low-income people so that they can start or run their own businesses – began in Asia and South America in the 1970s and rose to prominence with the awarding of the 2007 Nobel Peace Prize to Muhammad Yunus, founder of the Grameen Bank in Bangladesh. Since then, the industry has grown rapidly, with some estimating it to be worth as much as $200 billion.
While microfinance institutions are typically not-for-profit and operate with the explicit goal of fighting poverty, this booming growth has led many for-profit banks to enter the industry in hopes of capitalizing on the market. Duke says that this has changed how and why some loans are made.
“Now a lot of loans are not to a peer group, they’re just given straight to individuals, and they’re not always tied to starting or operating a small business,” said Duke. “Now people can just use them for personal consumption; to buy TVs, to pay their children’s school fees, or to repay other loans.”
The microfinance boom is particularly notable in Mexico, where large, for-profit banks have entered the market, especially since Banco Compartamos raised $467 million in its 2007 IPO. Duke says Mexico is an interesting case to study because the interest rates on microloans are among the highest in the world, which allows for-profit banks to make more money on loans. Duke hypothesizes that this for-profit influx has changed the nature of urban micro-lending in the country, and may affect microfinance’s impact on poverty.
“What I want to see is to what extent microfinance has gone from being an instrument for addressing poverty to becoming the new moneylender – essentially payday loans and predatory lending,” said Duke.
Duke’s research will center on the city of Guaymas in the state of Sonora, Mexico. He will map out what microfinance options are available and, through interviews and other more anthropologic research techniques, find out which products people are using and what they’re using them for.
“In urban areas, my general sense from previous qualitative research I did, is that a lot of the loans are being channeled into consumption,” said Garcia. “They’re not necessarily impacting poverty.”
Duke’s research is funded by the Michael LaTour Memorial Fund for Research Excellence. A professor of marketing and law at Ithaca College, LaTour passed away in November 2015. The LaTour Fund was established in his memory to recognize the research and accomplishments of School of Business professors at Ithaca College.
“Mike was my neighbor and a good friend – his office was right across from mine,” said Duke. “I’m really happy to have received this grant and I think Mike would agree that this research is a good use of the funds.”