Wednesday, April 14, 2010

Mistakingly limiting 'sustainability' to 'profitability' and the consequences

Unfortunately, good intentions, such as CGAP's initiatives in microfinance to help the poor, continue to focus on profitability as the main engine for sustainability of the financial institutions. In other words, non-profit mutual institutions are discouraged in favor of profitable banking practices, which invariably can turn predatory.

A recent New York Times article is a painful reminder of this fallacy of profitability being good in the arena of microfinance. My understanding of the ancient rules of usury (which predate Islam, and Islamic scripture never claimed that it introduced a new prohibition in this regard) is that the extension of credit for profit (whether through direct interest-based lending, as in conventional banking, or through credit sales and leases, as in "Islamic finance") is the essence of usury. It defeats the social insurance aspect, and easily turns profit motives into predatory incentives on the part of lenders and irresponsible spending on the part of borrowers (and, again, structuring the loan through credit sales or leases changes nothing in this regard!).


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