Andy Mukherjee at Bloomberg has a really interesting article that just about touches some of the aspects of microcredit, and why microcredit isn’t a threat to Capitalism.
Micro-credit is a coping device. It is a big help in countries where legal contracts with individual borrowers may not be worth the paper they are written on, where the judicial systems are slow and overburdened, where the poor have little legally acceptable collateral to offer, and where credit history is worthless because no one is recording or disseminating it.
In such a situation, as Yunus has so successfully demonstrated over the past three decades, creditor rights can be profitably protected by transferring the liability from individual borrowers to a group.
If anything, microcredit emulates capitalist lending at a smaller level. One of the best practices of a microcredit mechanism is that the borrower presents a case for a loan. In Ahmednagar, I met some women who explained that over three years they had changed the way they approved loans. In the beginning, the loans were for mostly non-entrepreneurial purposes. However, the group decided to support loans that supported livelihood more than other purposes because a person borrowing to enhance their livelihood was more likely to be able to pay back the loan with interest. Because it is group liability, the group is well within their rights to determine who gets the loan in a particular cycle.
The other interesting thing was how cases are put forward. We were observers for a particular meeting. One woman was asking for a loan to get an LPG connection. While initially the group was doubtful about how she was going to pay back, the woman clearly laid out how having an LPG meant about 3 hours of less work a day to get wood to light the stove. (Note – 3 hours because the watershed programme in the village meant that they couldn’t chop wood in a particular area and had to walk further.) She explained how the extra three hours would mean more time invested in the small business she had. The group agreed.
Truth is, the welfare model of microcredit doesn’t work well. Because the loan doesn’t really enhance income, there is no way to pay it back, except to get a loan from another micro-credit group.
Posted on October 19th, 2006 by Neha Viswanathan
Filed under: India, Marketplace and All Things Current
Thanks for the insight. I recently wrote a piece about microlending on my website as well. I think microlending is a concept that deserves as much publicity as possible, given poverty in the world today. It provides much needed hope for those who need it most.