Revisiting Microlending

Regular readers of this blog know that I am a strong advocate of microlending and a Kiva lender (have you clicked on the widget on the left sidebar yet?). The main reasons why I am strongly in favor of such programs are summarized in this Independent article.

At the same time, I do not consider microlending a substitute for anti-poverty, gender literacy and overall development programs. Microlending is not the magic wand that will solve all the problems of the Global South. It is one tool that should be used and supported, but there is no substitute for things such as public health policy.

One of the things that is often mentioned in microlending discussions is the high rate of reimbursement and the low rate of default. The poor do pay back. Based on this simple fact, it is not surprising to find that investment firms have been interested in moving in on the microlending potential bonanza (there is no shortage of poor women in the Global South) as a mode of investment for 401k-type of investments. That is how for-profit microlending businesses have emerged. And so, Der Spiegel legitimately asks:

Compare and contrast:

Since he received his Nobel Prize for the work of the Grameen Bank, Yunus has been busy promoting his social business model (businesses that are designed to not generate profit but deliver social goods).

In contrast, Choudhury’s ASA has a different model. It is a for-profit business that is based on (foreign) investment. TIAA-CREF is mentioned as one such investor, along with other pension funds.

An even more extreme form of for-private microlending is Compartamos, which was featured in an episode of Now on PBS (video). Yunus has been especially critical of Compartamos which he sees as exploitation:

For Yunus, this defeats the purpose of microlending, which was, in part, to get rid of the system of usury. But for him, the for-profit microlenders are usurers making a comeback.

What is obvious is that there is indeed a struggle for the definition (or redefinition) of the way microlending should work. Is Yunus’s model obsolete compared to the young and hip American-born and trained economists of ASA? I would argue that the for-profit model might have looked good a few years ago, and its proponents might have thought that they had won the battle. With the global economic collapse, things might be different and Yunus’s social business model might not look so obsolete.

3 thoughts on “Revisiting Microlending

  1. Good post, Christine.

    In my estimate, humanitarian organizations and NGOs exist largely because markets fail to provide and governments fail to protect. There are some areas where markets can in fact self-correct (for-profit microlending), but some issues are simply out of scope (human trafficking).

    In the long-run, if we are to wean the Global South off dependance on foreign aid, should lending be done by government or the market? The answer to the profit question depends on how we answer that question. It seems to me that lack of credit among the poor is one of the few issues where market-based approaches to poverty reduction actually makes a lot of sense. I think it’s fine to make a profit off of microloans, because in a competetive marketplace, consumers will benefit as the process becomes more efficient with lower profit margins.


    • Hey Dave,

      I think positing things in terms of the dichotomy “the government or the market” is limiting. Why should this be the only alternative? We could easily conceive of public/private mix, or social business models (as Yunus proposes) or civil society-based models.

      Also, the idea that market-based solutions are automatically more efficient and benefit everyone flies in the face of contrary evidence, such as health care and public health (the US market-based system being the least competitive and the least efficient of all developed countries) or education (for the complaining, there is no doubt that, worldwide, public education systems are the most efficient). Also, the countries with the highest quality of life on many indicators are those with strong social systems that deuce inequalities through various forms of redistribution.

      So, overall, we should avoid simplistic dichotomies and actually look at what works. The reason why someone like Yunus is against for-profit microlending is that, by definition, the goal of a corporation is make money, nothing else. Not to solve poverty. At some point, these are conflicting interests.

      Also, the issue is not does it help the poor? The issue is whether it’s ok to extract wealth from the poor (through interest rates) and channel it back to rich countries and investors?

      • Thanks for you thoughts Christine. I agree with your two main points: 1) There is a proper role for civil society organizations and 2) The market does not meet basic needs (primary education, public health, etc.) in an equitable or efficient way. The dichotomy I set up does not quite work.

        However, do you think the business model you articulate could be changed? Jed Emerson has done a lot of work on the idea of a “blended value” business, that is, one that seeks to create economic, social, and environmental value through its activities. Would a firm that decided, from the beginning, to make a moderate return and address poverty be problematic?

        I hope to continue the conversation, thanks again for your feedback.

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