Wednesday, October 20, 2010

The shady nuances of microlending

I have long been an advocate of increasing the poor's access to credit. Poor people don't have the capital to invest in their ideas, so credit is a way for them to capitalize. But at the same time, I know that credit is dangerous. The poor don't have the liberty of taking on much additional risk, and unpaid loans can spiral out of control if things don't go according to plan. In particular, while the idea of microcredit that has swept the development arena in the past decade or so has intrigued me, I've had a few concerns about it. First off, microcredit institutions usually charge pretty high interest rates to borrowers. They are probably justified when they say that the high rates are necessary to cover their risk, but it still seems counterintuitive to tout high-interest loans as a positive development for the poor. Secondly, it seems to me that microcredit institutions often lend preferentially to small merchants or other quick-turnover businesses. This is understandable given that the lenders want to recuperate their capital as quickly as possible, but I've always believed that those in most need of loans are farmers. This is why when I talk about credit I tend to favor the idea of government-backed, low-interest agrarian loans, which were key to creating economic growth and well-being in the US and Europe.

Anyway, I still haven't decided what I think of all this, but here are two articles on microlending. The first is a rather sunny prognosis on shareholder-held, for-profit microlending banks, by one of the originators of the phenomenon. The second is a report on some of the problems that microlending institutions are running into (and causing) in India.

Finally, here is a video in which a researcher gives an insightful, nuanced treatment of microfinance.

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