Does ‘microlending’ actually fight poverty?(boston.com)
boston.com
Does ‘microlending’ actually fight poverty?
http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/small_change_does_microlending_actually_fight_poverty/?page=full
30 comments
>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.
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.
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.
You may also be interested in another study done a few years ago that was based on random samplings of high interest rate loans to the poor: http://online.wsj.com/article/SB119388104410378595.html?mod=...
Excerpt: "The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy. We then tracked both groups over the next six to 27 months, measuring their well-being based on a range of economic, social, health and mental health measures. Applicants who were randomly approved for a loan had higher incomes, less hunger, better credit scores and more positive outlooks than their control group counterparts -- even after paying the high interest rate. Though they had higher than normal default rates, the borderline loans were also profitable for the lender."
Excerpt: "The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy. We then tracked both groups over the next six to 27 months, measuring their well-being based on a range of economic, social, health and mental health measures. Applicants who were randomly approved for a loan had higher incomes, less hunger, better credit scores and more positive outlooks than their control group counterparts -- even after paying the high interest rate. Though they had higher than normal default rates, the borderline loans were also profitable for the lender."
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.
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.
"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).
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).
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.
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.
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.
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.
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.
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/
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/
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.
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?
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.
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... :-)
so your definition of entrepreneur is probably a bit narrower than the usual definition... :-)
Part of being an entrepeneur is the ability to exploit information from not only prices, but also non-price information that would be hard to find from simply looking at prices.
Another part is the ability to marshall resources to capture these opportunity. That may take a perfect pitch, an eye for talents, or something else entirely.
Another part is the ability to marshall resources to capture these opportunity. That may take a perfect pitch, an eye for talents, or something else entirely.
with regards to becoming an entrepreneur for simple need, I've seen this happen a lot in my country (specially in my region, which is quite poor): a lot of people doing business simply because there aren't really any other options. Same happens in the countryside (many people don't see agricultural activity as 'entrepreneurship' though).
Also, the number of startups tends to rise during recessions could be interpreted the same way: the more people lose their regular jobs, the more entrepeneurs enter the rig. Talented or not, willingly or not... [1]
[1] http://www.wired.com/culture/culturereviews/magazine/17-06/n...
Also, the number of startups tends to rise during recessions could be interpreted the same way: the more people lose their regular jobs, the more entrepeneurs enter the rig. Talented or not, willingly or not... [1]
[1] http://www.wired.com/culture/culturereviews/magazine/17-06/n...
IMO, entrepreneurialism is an inate human trait. However, this doesn't mean it's expressed in everyone you meet, day-in-day-out. It clealy isn't. It's possible technology is simply an accidental expression of this trait. Which is interesting yet terrifying if true.
It does seem a bit too convenient that they are reporting on and reporting the researcher conclusions without feeling the need to actually publish the underlying research and opening themselves to scrutiny - but hopefully that will come out soon enough.
The difficulty of doing this in the field is trying to figure out what the appropriate methodologies to use are. It's not like it's easy to collect this information over time and ensure people are forthcoming (and in many regions where microfinance thrives, the poor are especially and legitimately suspicious of authority and people wanting personal information). Collecting information often becomes a messy process in collecting objective and comprehensive data.
The difficulty of doing this in the field is trying to figure out what the appropriate methodologies to use are. It's not like it's easy to collect this information over time and ensure people are forthcoming (and in many regions where microfinance thrives, the poor are especially and legitimately suspicious of authority and people wanting personal information). Collecting information often becomes a messy process in collecting objective and comprehensive data.
I disagree. But I can admit that it depends on your definition of entrepreneurial.
My definition is simply someone who goes into business for themselves as opposed to getting a job. Taken that way, most people will be entrepreneurial given a good enough reason; and it's far from rare.
Also, it's surprising how many people work full time and have small side businesses they run part time. I believe I read a report that said the majority of US businesses are part-time, one-person only.
My definition is simply someone who goes into business for themselves as opposed to getting a job. Taken that way, most people will be entrepreneurial given a good enough reason; and it's far from rare.
Also, it's surprising how many people work full time and have small side businesses they run part time. I believe I read a report that said the majority of US businesses are part-time, one-person only.
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.
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.
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.
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.
Thorough MIT study says no, yet price that is awarded to corrupt and sometimes criminal statesmen all the time says yes.
I guess that means yes.
I guess that means yes.
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.
I think http://en.wikipedia.org/wiki/Basic_income is better way to fight poverty.
So putting people into debt doesn't help them get out of poverty? Is this surprising?
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.
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.
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.
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.
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.
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.
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.
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.