Microfinance Control Fraud: Poverty and Profiteering in Latin America

Will Butcher & James Galbraith (2015): Microfinance Control Fraud in Latin America, Forum for Social Economics, DOI: 10.1080/07360932.2015.1056203

31 Pages Posted: 2 Oct 2015

See all articles by Will Butcher

Will Butcher

University of Texas at Austin - College of Liberal Arts

James K. Galbraith

University of Texas at Austin - Lyndon B. Johnson School of Public Affairs; Levy Economics Institute of Bard College

Date Written: September 30, 2015

Abstract

Over the past three decades, the global microfinance industry has witnessed phenomenal growth in terms of the number of borrowers and the total gross loan portfolio outstanding. An application of the criminologists’ perspective and Black’s theory of control fraud to the global microfinance industry reveals a high degree of overlap between the common characteristics of control frauds and the characteristics of the microfinance industry and suggests that the sector provides a criminogenic environment suitable to Ponzi-type dynamics, including an imperative of growth, misrepresentation of financial and operating performance, a reputation for integrity and innovativeness, concentration in unregulated markets and areas most conducive to accounting fraud, non-transparency and secrecy, dubious accounting methods, lobbying in favor of deregulation, attempts to suborn controls such as accountants, lawyers, regulators, and rating agencies, executive use of the company for personal gain, excessive risk taking at the expense of investors’ capital, warnings raised but ignored, and, finally, inevitable collapse. Regulatory interventions are needed to prevent predatory lending and over-indebtedness of poor microfinance borrowers in Latin America and elsewhere. Such regulation, while necessary to protect the poor, is not well liked by the investment community as it places microfinance institutions under local scrutiny, reduces the profitability of the sector, and limits opportunities for control fraud.

Keywords: microfinance, control fraud, Ponzi, criminology, regulation

Suggested Citation

Butcher, Will and Galbraith, James K., Microfinance Control Fraud: Poverty and Profiteering in Latin America (September 30, 2015). Will Butcher & James Galbraith (2015): Microfinance Control Fraud in Latin America, Forum for Social Economics, DOI: 10.1080/07360932.2015.1056203. Available at SSRN: https://ssrn.com/abstract=2667632

Will Butcher (Contact Author)

University of Texas at Austin - College of Liberal Arts ( email )

Austin, TX
United States

James K. Galbraith

University of Texas at Austin - Lyndon B. Johnson School of Public Affairs ( email )

2300 Red River St., Stop E2700
PO Box Y
Austin, TX 78713
United States
512-471-1244 (Phone)

Levy Economics Institute of Bard College

Blithewood
Annandale-on-Hudson, NY 12504
United States
845-758-7700 (Phone)
845-758-1149 (Fax)

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