
Does ‘microlending’ actually fight poverty? - robg
http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/small_change_does_microlending_actually_fight_poverty/?page=full
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roundsquare
The time frame is very problematic. With most Grameen style lending, there are
several year long cycles where the size of the loan increases each year. So in
year 1 you get a tiny loan, if you pay it back then in year 2 you get a
slightly less tiny loan, etc...

In the first year, its fairly common for that loan to be used to refinance a
loan at a really high interest rate from a local money lender, but this does
provide some benefit. Now you are paying back a loan at 15% instead of 50%.

Also, a lot of the money goes into paying for kids' education, something that
will not have any real ROI in the short term. I'm curious about the mention
that education hasn't improved, from what I've seen this doesn't match but I
haven't really done a large scale survey.

Its true, some recipients use the money for non profit-making activities (e.g
wedding dowries), but my understanding is that many of these would happen
anyway with loans at a higher interest rate.

In any event, anyone who thinks that one type of financial instrument is going
to solve poverty is mis-guided, but I don't know that these studies really
show a lot.

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tigerthink
>They created their controlled experiment by altering the algorithm the bank
used to evaluate creditworthiness so that some borderline applicants were
randomly denied loans while other otherwise identical applicants had loans
approved.

So maybe the banks need to set a higher threshold on who they loan to. This
doesn't say much about the effectiveness of microcredit for well-qualified
applicants.

~~~
mbrubeck
Yes, exactly. In fact, this could be interpreted as evidence that the bank's
standards are close to ideal. The loans have a basically neutral effect on the
marginal borrowers (the only borrowers included in the Dartmouth experiment),
which is exactly what you hope to see if you're trying to draw a line between
people who would be helped by loans and those who are more likely to be
harmed.

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vitaminj
I can't say this is at all surprising. My experience in providing rural
communities with electricity is somewhat analagous to what is being said about
micro-credit.

I've been working on rural electrification in a small developing country for
the last 7 months. Donors and NGOs are always banging on about how access to
electricity will lead to income-generating and educational activities among
the villagers, eg. they could buy a bamboo-cutting machine or study textbooks
at night under fluorescent lamps.

But we invariably find that apart from lighting, the first thing most
households do when they get electricity is buy a home stereo system or a tv
and satellite dish. One of my colleagues scoured the countryside for evidence
of income-generating activities and the best he could find was a bunch of
villagers sorting farm produce under a lamp.

So like micro-credit, it seems that access to electricity is more about making
life in rural communities more convenient than it is about climbing out of
poverty.

~~~
onreact-com
"So like micro-credit, it seems that access to electricity is more about
making life in rural communities more convenient than it is about climbing out
of poverty."

Making life convenient is climbing out of poverty. In the West only the
homeless don't own TV or can't at least afford them. You can't expect people
who have nothing to invest the first money they get.

On the other hand mobile phones have proven very useful in the developing
world. They get used for everything: Banking, people rent their mobiles to
other people (like a phone booth so to say), even organizing fishing (fishers
exchange news where the fish actually is).

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tsally
Well, last time I checked microlending had a repayment rate over 90%, so it
certainly must have some impact. If it wasn't effective in fighting poverty, I
doubt you'd see such a high repayment rate. Will microlending alone solve the
problem? No. But it's one of the best tools we've got so far.

~~~
trjordan
Did you read the article? The point seemed to be that it certainly smoothed
out some peoples lives, it did not actually have a measurable effect on the
wealth of either their families or their communities.

It struck me as something closer to credit cards for all instead of business
loans for all. When you're poor, credit can help carry you through periods
where you might lose a lot due to unlucky circumstances, but it will not
actually increase your productivity or efficiency. Repayment rate has nothing
to do with long-term social impact.

~~~
tsally
Did you even read my comment? I specifically addressed this when I said: "
_Will microlending alone solve the problem? No._ ". I simply argue that
microlending is one tool out of many that we should use.

Indeed, you seem to agree with me: " _credit can help carry you through
periods where you might lose a lot due to unlucky circumstances_ ". Allowing
families to hold onto a lot of resources they would have lost certainly is
helping to fight poverty.

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cwan
I'd really be interested in seeing the published research. I do however agree
with the point that there are too many practitioners and advocates who see
microfinance as a panacea - and in many ways it is a radical departure from
the way aid has previously been provided as it provides a real potential for
being a sustainable way to deliver financial services to the poor.

This being said, it is difficult to isolate the effects of finance - and you
can't generalize microfinance globally as it really depends on the local
regulatory environment as to how successful it can be. To generalize as the
Boston Globe has done is to say that the banking sector in Canada, US,
Britain, France, etc. are all the same - when we know (the hard way) they are
not. Microfinance - like all finance is a great and important step for
businesses (and it's not just credit, but other access to bank accounts,etc
that the poor in these countries previously had no access to), but it's just
one component to building wealth.

For a broader view of development - I'd point to the world bank's
doingbusiness.org study - the latest of which just came out a week or two that
looks at all areas of business like how easy it is to legally set up a new
business, close an old one down, etc.: <http://doingbusiness.org/>

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JulianMorrison
Entrepreneurial skill is a rare human trait. But they lift the rest of us
beyond starting from scratch with flint and bearskins, so it shouldn't be
dismissed just because it isn't universal. Have those same studies looked at
accumulation of capital and infrastructural reinvestment in regions saturated
with microcredit? I suspect a left wing bias that views the rising few with
suspicion.

~~~
herval
IMHO, entrepeneurial skill is not a 'human trait', gift or anything - it's
just a skill, like any other - you can develop it if you absolutely need it to
survive (usually the case for microlenders). I'd say the reason why there are
usually less entrepeneurs than 'normal' people is more on taste than 'talent':
if you're doing just fine with a paycheck, why bother?

~~~
JulianMorrison
I'm curious to see your evidence. I have noticed in life many businesses that
pay the salary and the rent, but I wouldn't count them as entrepreneurial -
they lack the explosive upward trajectory, and I don't think I was just seeing
the slow part of the exponential. Real skill as an entrepreneur seems to me
more like perfect pitch - a mutation.

~~~
herval
an entrepreneur is "a person who organizes and manages a business undertaking,
assuming the risk for the sake of the profit."

so your definition of entrepreneur is probably a bit narrower than the usual
definition... :-)

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dtap
_I would really ask the question, ‘Why did we expect all these things to
happen?’ If you give people access to a financial instrument, it’s like any
other instrument. It’s useful, but it’s not like the miracle drug to end
poverty._

A rough reality. I trust that MIT will publish the research with the same
conclusions. It is really unfortunate. I was really excited about millions of
people digging themselves out of poverty. Alas, it is much more complicated
than that.

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johndoe77
I would say yes. The 2006 Nobel Peace Prize was awarded to Muhammad Yunus of
Bangladesh for helping millions.

<http://www.rediff.com/news/2006/oct/13nobel.htm>

Former President Bill Clinton just name dropped Yunus on The Daily Show this
week. He mentioned that a microlending bank has up popped up in NYC.

~~~
anamax
The Nobel Peace Prize has been given in recognition of several dumb ideas.

~~~
philwelch
I think it's been awarded multiple times for "solving" the Israel/Arab
conflict.

------
known
I've seen microlending leading to
<http://en.wikipedia.org/wiki/Psychological_abuse>

I think <http://en.wikipedia.org/wiki/Basic_income> is better way to fight
poverty.

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quellhorst
So putting people into debt doesn't help them get out of poverty? Is this
surprising?

~~~
roundsquare
You should read a bit about micro finance. Most of the people receiving it are
already in debt, micro finance offers debt at a better interest rate,
sometimes with training, and often with a support group. Its supposed to be
(in theory) _better_ debt.

~~~
Tangurena
It also makes the donors who finance Grameen feel better about themselves.

The better interest rate is a great idea, as there are many farmers in India
and Pakistan that commit suicide because they got trapped into a cycle of debt
that they cannot escape.

And I suspect that the better repayment rate has a lot to do with social
pressure. The support groups are part _rah rah_ team and part shame squad to
guilt the delinquent into repaying the loans.

Microlending is better than what the locals have already (which are pretty
much what we call "loan sharks" in the West). It isn't as good as the lending
and financial industry that we have here, but it is an improvement, and in my
opinion, a step in the correct direction.

~~~
roundsquare
_And I suspect that the better repayment rate has a lot to do with social
pressure_

Thats certainly a large part of it, but there are two other things that tend
to help out:

1) If one person can't pay back, the rest of the group helps.

2) The promise of bigger loans in the future.

I agree with you about the interest rates.

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onreact-com
Creating precarious working places for otherwise desperate people helps a lot
but on the other hand can't lift an economy out of poverty.

As long as most countries in the so called "third world" get exploited by the
West which via the IMF and World Bank does not even allow them to built an
infrastructure ("barriers to free trade" like hospitals, schools,
environmental protection, labor rights) they won't make it.

The West should pay reparations for colonialism and slavery to the countries
affected by them. This would ease the situation a little.

