The problem with microfinance

When Muhammed Yunus first got going with Grameen Bank there was all sorts of misunderstanding about what he\’s actually done.

Stripped down to its essence what he had really done was to replace the traditional measures of collateral with social pressure to repay a loan.

Borrowers are organised into groups, only one of the group cn have a loan at any one time, thus the other members of the group will apply social pressure to ensure repayment, so that they can take out a loan.

That\’s the secret at the heart of microfinance: not just lending small amounts to poor people.

However, even this new form of collateral is subject to the possibility of default:

MADOOR, India — India’s rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.

If that social pressure to repay disappears then the industry is entirely fucked, isn\’t it?

6 thoughts on “The problem with microfinance”

  1. Isn’t microfinance another way of saying “sub-prime”? This is not my being snarky – it is a genuine question. What is the difference?

    Tim adds: Sorta, then again not sorta.

    Yes, it’s like sub prime in thatit’s lending to those not usually considered good for a loan. It’s not sub prime in that instead of taking bad collateral of the traditional type (sub prime) it invented a new form of collateral.

    The full story is still hazy: I would suspect that some of the newer, for profit, micro lenders haven’t quite grasped that new collateral bit and have turned what was micro finance into exaclty what you say, a version of sub prime.

  2. I don’t really see how this holds. So person X doesn’t repay their loan, so no one else in the group gets one, so they put pressure on X to repay their loan.
    It might not always work, but what does?

  3. As you say in your reply to Jonathan, there are a lot of these companies in India, and few of them follow the strictures developed by Grameen.

  4. Koreans (and Koreans in the U.S.) have a long-established method of financing small ()and some not so small) business venture caleed a “ke.” It can be for any specific amount and run for any specific numer of months (same as number of members. There’s an interest rate built in so that the first half of the receivers pay interest with each payment and the back half share in the extra proceeds. There are additional conditions such as that one member is made responsible for hounding anyone who’s late (and of making the payment themselves in some cases). In some, each recipient is obligated for a small party for all when “his ship comes in,” and there’s definitely a community awareness of who’s qualified and who’s not (which means that some can get into one being run by non-acquaintances through appropriate recommendation). Failure to make the required payment conveys a heavy social stigma. (And there are quite a few with extra money reliably ready to take “back-end” positions for the income.

    Chinese communities also have an organized form of money-lending for enterprise different in that the money comes from organizations of elderly folk (maybe retirees with cash-stashes of untaxed origin), usually funneled to the need through a reliable, successful businessman who seeks out and “vets” the opportunities for the actual investors.

Leave a Reply

Your email address will not be published. Required fields are marked *