Sunday, December 12, 2010

Microlending, or microequity?

As I discussed in a past blog post, there are some problems with microlending. Namely, interest rates are often high, and some large microlenders threaten borrowers or drive them crazy in the course of trying to collect.

An issue of the excellent Tiers Monde journal was devoted expressly to the possibilities of microlending to reach the poor, and improve their life or not. It was entitled "Is microfinance socially responsible?". An interview in the Grain de Sel journal gives background on microfinance and its limitations for promoting agrarian development.

But this last article from the World Policy Institute is really interesting. It speaks of microequity, not just microloans. Given the lack of evidence that microcredit has driven any sort of widespread, sustained growth in the world, the author says that microfinance should aim to foster entrepreneurs that create businesses and prosperity. His prescription to achieve this is that microlending institutions become microfinance institutions writ large. They should not just lend, but become part-owning business partners, through investing venture capital in new businesses created by borrowers. According to the author, this approach would have better potential to promote development than does microlending, because it's difficult for a business to build itself on debt alone.

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