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Microfinance; can small loans solve poverty?

duallainduallain Registered User regular
edited February 2009 in Debate and/or Discourse
According to Wikipedia, “Microfinance refers to the provision of financial services to “poor” or low-income clients, including consumers and the self-employed.” Microfinance has promised to help alleviate poverty, and serve those left out of formal financial activities. Will it solve, or hell diminish, poverty?

Governments around the world often subsidize loans to microfinance institutions, and while the evidence seems to indicate that this is typically in the best interest for all parties involved, this raises the question should private citizens be donating their money, or the use of their money, to organizations like Kiva? I have to choose loaning money through Kiva, and say, investing the money and giving the proceeds to the March of Dimes, why should I choose Kiva?

duallain on

Posts

  • XheroXhero la contr'une Registered User regular
    edited February 2009
    I don't think so. While they claim to be unexploitive, the loans have ridiculously high interest rates that hamper the speed of growth to a considerable extent. Granted, their competition are loan sharks, but the extreme cost to operate highlights the main problems the programs have with success.

    Xhero on
  • ObsObs __BANNED USERS regular
    edited February 2009
    It has potential.

    I'd be interesting in seeing how much the investors are actually getting back though.

    Obs on
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    nothing is in the best interest for all parties.

    economically, someone has to lose.

    there is no free lunch.

    Dunadan019 on
  • duallainduallain Registered User regular
    edited February 2009
    @xhero:
    When you say, "ridiculously high interest rates" what rates are you figuring?

    That Morduch paper claims that MFIs cap interest rates below sustainable rates (~20% for Grameen) and that a financially sustainable interest rate could be as low as 32% (even without drastic cost cutting measures in the management structure.)

    Though I do agree that the cost of many small loans > few larger loans.

    duallain on
  • duallainduallain Registered User regular
    edited February 2009
    Dunadan019 wrote: »
    nothing is in the best interest for all parties.

    economically, someone has to lose.

    there is no free lunch.
    Is trade, and production specialization not a mutually beneficial activity? Loans and savings accounts seem like activities that also benefit all parties involved. While I agree that there is always cost, I'm not entirely sure I buy that economics can't be mutually beneficial.

    duallain on
  • His CorkinessHis Corkiness Registered User regular
    edited February 2009
    Adam Smith is rolling in his grave.

    His Corkiness on
  • SaammielSaammiel Registered User regular
    edited February 2009
    Dunadan019 wrote: »
    nothing is in the best interest for all parties.

    economically, someone has to lose.

    there is no free lunch.

    Wealth generation is not a zero sum game.

    Saammiel on
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    Saammiel wrote: »
    Dunadan019 wrote: »
    nothing is in the best interest for all parties.

    economically, someone has to lose.

    there is no free lunch.

    Wealth generation is not a zero sum game.

    wealth generation is based on increasing population and increasing time. time is a resource just like any other. the human population hasn't decreased yet.... but if it ever does, we will lose value.

    Dunadan019 on
  • monikermoniker Registered User regular
    edited February 2009
    Adam Smith is rolling in his grave.

    :|

    moniker on
  • His CorkinessHis Corkiness Registered User regular
    edited February 2009
    moniker wrote: »
    Adam Smith is rolling in his grave.

    :|
    Sorry, this was in reference to Dunadan's comment, not anything to do with microfinancing.

    His Corkiness on
  • shrykeshryke Member of the Beast Registered User regular
    edited February 2009
    Adam Smith is rolling in his grave.

    Strap on the magnets then. Let's put that corpse to fucking work.

    shryke on
  • YarYar Registered User regular
    edited February 2009
    The idea that "someone has to lose" is so laughably ignorant.

    If I have a sandwich and I'm not hungry, but I could use some money, and you have a lot of money but you're hungry and don't have anything handy to eat...

    Yar on
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    Yar wrote: »
    The idea that "someone has to lose" is so laughably ignorant.

    If I have a sandwich and I'm not hungry, but I could use some money, and you have a lot of money but you're hungry and don't have anything handy to eat...

    ypu tale time to make the exchange and both of you lose time in order to gain something else.

    its not so much 'someone has to lose' as 'there is a hidden cost to all actions that appear to have no cost'

    Dunadan019 on
  • YarYar Registered User regular
    edited February 2009
    Dunadan019 wrote: »
    its not so much 'someone has to lose' as 'there is a hidden cost to all actions that appear to have no cost'
    Ah, well, two things:

    1) That isn't at all what you said, and

    2) The hidden cost of the time it takes for me to sell you my sandwich means dick-all in the equation. By all means, go ahead and factor it in. You still have no clue what you're talking about.

    Yar on
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    Yar wrote: »
    Dunadan019 wrote: »
    its not so much 'someone has to lose' as 'there is a hidden cost to all actions that appear to have no cost'
    Ah, well, two things:

    1) That isn't at all what you said, and

    2) The hidden cost of the time it takes for me to sell you my sandwich means dick-all in the equation. By all means, go ahead and factor it in. You still have no clue what you're talking about.

    1) this is how it works, you say something and then have to explain it further when someone doesn't understand.

    2) there are other hidden costs to items your regard as free, that was the simple one.

    Dunadan019 on
  • YarYar Registered User regular
    edited February 2009
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    Yar on
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    Yar wrote: »
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    no.... they were clarifications of my first post.........

    there is no free lunch is a common way in economics of saying what i was trying to say...

    here is your wiki article....

    Dunadan019 on
  • monikermoniker Registered User regular
    edited February 2009
    Dunadan019 wrote: »
    Yar wrote: »
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    no.... they were clarifications of my first post.........

    there is no free lunch is a common way in economics of saying what i was trying to say...

    here is your wiki article....

    Yes, there is no such thing as a free lunch. How does that preclude mutually beneficial contracts that are in the best interest of all parties?

    moniker on
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    moniker wrote: »
    Dunadan019 wrote: »
    Yar wrote: »
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    no.... they were clarifications of my first post.........

    there is no free lunch is a common way in economics of saying what i was trying to say...

    here is your wiki article....

    Yes, there is no such thing as a free lunch. How does that preclude mutually beneficial contracts that are in the best interest of all parties?

    oh, im sorry, i didn't mean someone as in a person or party. thats my bad. should have used a different word instead of 'someone'

    Dunadan019 on
  • monikermoniker Registered User regular
    edited February 2009
    Dunadan019 wrote: »
    moniker wrote: »
    Dunadan019 wrote: »
    Yar wrote: »
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    no.... they were clarifications of my first post.........

    there is no free lunch is a common way in economics of saying what i was trying to say...

    here is your wiki article....

    Yes, there is no such thing as a free lunch. How does that preclude mutually beneficial contracts that are in the best interest of all parties?

    oh, im sorry, i didn't mean someone as in a person or party. thats my bad. should have used a different word instead of 'someone'

    :|
    I have no idea what you're saying right now.

    moniker on
  • Gnome-InterruptusGnome-Interruptus Registered User regular
    edited February 2009
    Xhero wrote: »
    I don't think so. While they claim to be unexploitive, the loans have ridiculously high interest rates that hamper the speed of growth to a considerable extent. Granted, their competition are loan sharks, but the extreme cost to operate highlights the main problems the programs have with success.

    Microfinance does not necessitate high interest rates.

    I'm pretty sure some dude in India or somewhere in Africa actually recieved a Nobel Prize for opening a bank that dealt specifically with small loans of like $20 with very low interest rates. They found that the people that they were loaning to were more likely to pay the money back on time than their larger loans. These small loans also helped the very small home run business earn enough capital to become self sustaining and even create surplus money, which for people living in poverty is an amazing thing.

    Gnome-Interruptus on
    steam_sig.png
    MWO: Adamski
  • Dunadan019Dunadan019 Registered User regular
    edited February 2009
    moniker wrote: »
    Dunadan019 wrote: »
    moniker wrote: »
    Dunadan019 wrote: »
    Yar wrote: »
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    no.... they were clarifications of my first post.........

    there is no free lunch is a common way in economics of saying what i was trying to say...

    here is your wiki article....

    Yes, there is no such thing as a free lunch. How does that preclude mutually beneficial contracts that are in the best interest of all parties?

    oh, im sorry, i didn't mean someone as in a person or party. thats my bad. should have used a different word instead of 'someone'

    :|
    I have no idea what you're saying right now.

    instead of 'someone has to lose' i should have said 'something has to be taken away' because sometimes the cost isn't born by any parties associated with an agreement.

    my point was that there is always a cost, nothing more really. sorry if i implied more.

    Dunadan019 on
  • monikermoniker Registered User regular
    edited February 2009
    Xhero wrote: »
    I don't think so. While they claim to be unexploitive, the loans have ridiculously high interest rates that hamper the speed of growth to a considerable extent. Granted, their competition are loan sharks, but the extreme cost to operate highlights the main problems the programs have with success.

    Microfinance does not necessitate high interest rates.

    I'm pretty sure some dude in India or somewhere in Africa actually recieved a Nobel Prize for opening a bank that dealt specifically with small loans of like $20 with very low interest rates. They found that the people that they were loaning to were more likely to pay the money back on time than their larger loans. These small loans also helped the very small home run business earn enough capital to become self sustaining and even create surplus money, which for people living in poverty is an amazing thing.

    Grameen bank; it was in the OP. And ~30% is a very low interest rate in that part of the world. They'd normally be charged an order of magnitude more than through regular financial institutions. It would be nice if they were no interest loans, but the organizations who do the ground work of making sure that someone should be loaned to do have expenses. Things could probably stand to be improved, but over time I don't see why that can't happen. Especially as things like Kiva expand and get more institutional support.

    moniker on
  • SamSam Registered User regular
    edited February 2009
    microloans are stupid. The thing with major loans are there is always the possibility of the borrower profiting, or establishing a source of income. Even with a car, there is the resale value to deduct.

    Microloans, not so much.

    edit- at least not in a developed country, that is.

    Sam on
  • FencingsaxFencingsax It is difficult to get a man to understand, when his salary depends upon his not understanding GNU Terry PratchettRegistered User regular
    edited February 2009
    Sam wrote: »
    microloans are stupid. The thing with major loans are there is always the possibility of the borrower profiting, or establishing a source of income. Even with a car, there is the resale value to deduct.

    Microloans, not so much.

    edit- at least not in a developed country, that is.
    Yeah, well good thing the microloans are going to individuals in developing countries.

    Fencingsax on
  • The CatThe Cat Registered User, ClubPA regular
    edited February 2009
    moniker wrote: »
    Dunadan019 wrote: »
    moniker wrote: »
    Dunadan019 wrote: »
    Yar wrote: »
    So both your one and your two are complicated ways of admitting that yes, you were completely wrong in your first post.

    no.... they were clarifications of my first post.........

    there is no free lunch is a common way in economics of saying what i was trying to say...

    here is your wiki article....

    Yes, there is no such thing as a free lunch. How does that preclude mutually beneficial contracts that are in the best interest of all parties?

    oh, im sorry, i didn't mean someone as in a person or party. thats my bad. should have used a different word instead of 'someone'

    :|
    I have no idea what you're saying right now.

    "I'm a scientologist I'm a scientologist I'm a scientologist" is, I believe, the basic translation

    Grameen-style banks are very useful in helping the disempowered become less so, especially compared to hocking your shit at the pawn shop on the corner*, and they're a lot more stable than normal bank loans given the social pressure to pay it back, but the system can be abused by those running it the same as any other finance provision system can. That has happened, IIRC, and I think the Economist ran an article about an incident like that a year or two back.

    *this is actually a really big deal, even in developed countries; "legitimate" lenders like banks don't operate branches in the ghetto. Its part of why subprime lending disproportionately affected minorities in the US; the companies specifically targeted that class of people - they had little formal or informal financial education and practically expected to be ripped off after a lifetime of only experiencing shonky lending practices up close.

    The Cat on
    tmsig.jpg
  • The CatThe Cat Registered User, ClubPA regular
    edited February 2009
    Sam wrote: »
    microloans are stupid. The thing with major loans are there is always the possibility of the borrower profiting, or establishing a source of income. Even with a car, there is the resale value to deduct.

    Microloans, not so much.

    edit- at least not in a developed country, that is.
    That's a load of crap; the system has been used in Chicago with great success. It helps people pay for things like office skills courses, laptops for school, you know, investments in bettering yourself.

    The Cat on
    tmsig.jpg
  • FeralFeral MEMETICHARIZARD interior crocodile alligator ⇔ ǝɹʇɐǝɥʇ ǝᴉʌoɯ ʇǝloɹʌǝɥɔ ɐ ǝʌᴉɹp ᴉRegistered User regular
    edited February 2009
    I think microfinancing absolutely can work - with responsible lenders vetting the right candidates. I have nothing against Grameen Bank, for instance. However, Kiva.org gives me pause. The US is suffering from an economic and psychological disease where we borrow money we cannot repay to chase after lifestyles we cannot afford and cannot sustain. Is microfinance going to become a vector for that disease?

    For example, the deep economic shit in the US was caused in part by banks offering predatory loans to poor people so they can buy houses bigger than they can afford. When I went to Kiva.org for the first time and saw that the first "entrepeneur" listed on the site wanted a loan so he could add a room to his house, I nearly choked on a mouthful of beverage. Ditto for the woman who wanted a loan so she could start stocking soft drinks in her grocery store. I don't feel like I'm capable of judging these candidates from a photograph and a brief synopsis of their goals - and I don't trust Kiva to vet them thoroughly.

    It's useful to remember here that microcredit is not a new idea. If I loan my best friend $200 to get a couple new tires on his car so he can drive to work, that's microcredit. If I've been going to the same local electronics shop for computer parts for five years and he lets me occasionally pick up a part for my business on an ICU, that's microcredit. In discussions like this thread, the term "microcredit" does not refer to the general concept of microcredit, but to the institutionalization of what was previously an informal arrangement between friends, family, and neighbors. If somebody in my immediate social circle wants to borrow money, I'll have a general idea of whether their request is reasonable, whether they're responsible, whether loaning them money is a good idea.

    Institutions are typically - but not always - faceless, remote, aloof. In institutionalizing something so informal, care must be taken not to lose the benefits of face-to-face, personal, community interaction. That was Grameen Bank's success - they managed to integrate the benefits of small neighborly microcredit into their model. Further, Grameen's goal is to help people get out of poverty. Grameen loans, as I understand them, are to people who need clean water, clothing, basic housing, basic education.

    I'm not entirely sure that Kiva is doing this as successfully. I'm not sure that they're targeting the most deserving borrowers with the most responsible goals. They show me the face of a candidate, and I have no idea who this person is, what the context of their entrepenuerial plan is, how feasible or responsible their goals are. It's not a whole hell of a lot different from somebody walking up to me on the street and asking me for $200. Kiva is faceless, remote, aloof - even though posting a photo and a name of a complete stranger promotes the illusion that it's not. In some ways, it's the opposite of Grameen, and my instinct is that for all the benefit Kiva is capable of, it's also capable of great harm.

    Feral on
    every person who doesn't like an acquired taste always seems to think everyone who likes it is faking it. it should be an official fallacy.

    the "no true scotch man" fallacy.
  • The CatThe Cat Registered User, ClubPA regular
    edited February 2009
    Gold. And now that I think of it, that Economist article was criticising exactly the aspects of Kiva that you discuss. That particular operation really doesn't have much in common with the original Grameen operational model.

    The Cat on
    tmsig.jpg
  • ÆthelredÆthelred Registered User regular
    edited February 2009
    Isn't individual westerner > developing world entrepeneur credit incapable of being anything but institutional?

    Æthelred on
    pokes: 1505 8032 8399
  • SeptusSeptus Registered User regular
    edited February 2009
    Re Kiva: Yeah, I'd rather give a grant to a "proven" bank like Grameen, to offer a zero or very low interest source of revolving loans.

    Septus on
    PSN: Kurahoshi1
  • FencingsaxFencingsax It is difficult to get a man to understand, when his salary depends upon his not understanding GNU Terry PratchettRegistered User regular
    edited February 2009
    Septus wrote: »
    Re Kiva: Yeah, I'd rather give a grant to a "proven" bank like Grameen, to offer a zero or very low interest source of revolving loans.
    I mean, the loan is only about a year, and it's been going for a couple of years, so I imagine the risk isn't any greater than with other similar organizations.

    Fencingsax on
  • Kate of LokysKate of Lokys Registered User regular
    edited February 2009
    Feral wrote: »
    I think microfinancing absolutely can work - with responsible lenders vetting the right candidates. I have nothing against Grameen Bank, for instance. However, Kiva.org gives me pause. The US is suffering from an economic and psychological disease where we borrow money we cannot repay to chase after lifestyles we cannot afford and cannot sustain. Is microfinance going to become a vector for that disease?

    For example, the deep economic shit in the US was caused in part by banks offering predatory loans to poor people so they can buy houses bigger than they can afford. When I went to Kiva.org for the first time and saw that the first "entrepeneur" listed on the site wanted a loan so he could add a room to his house, I nearly choked on a mouthful of beverage. Ditto for the woman who wanted a loan so she could start stocking soft drinks in her grocery store. I don't feel like I'm capable of judging these candidates from a photograph and a brief synopsis of their goals - and I don't trust Kiva to vet them thoroughly.
    This was exactly my problem with it. My father gave me $100 of Kiva credit for my birthday last year, because he absolutely loves the concept behind the site, but I wasn't nearly as enchanted with it as he was. For every "loan me money so I can buy new tools to expand my small auto repair shop" or "loan me money so I can buy a cow to breed with my current bull so I can expand my herd," there were easily five or six "loan me money so I can add a porch to my house" or "loan me money so I can buy a crate of makeup to sell to the impoverished women in my village."

    Kate of Lokys on
  • monikermoniker Registered User regular
    edited February 2009
    The Cat wrote: »
    Gold. And now that I think of it, that Economist article was criticising exactly the aspects of Kiva that you discuss. That particular operation really doesn't have much in common with the original Grameen operational model.

    They were defrauded a few years back by one of the charitable organizations in Africa that handles the loan applications. It got settled and all the money was refunded, but yeah. Frontline/World had a story on the overall organization awhile back. I'm more comfortable with ShoreBank (and they've got a great interest rate) than I am with Kiva, but the idea is interesting and if I were to lose $100 I'm not about to cry myself to sleep. It's probably something I'll start up next year if/when have I have some walkin' around money.

    And anyone who is interested in socially responsible lending should look into Shorebank. Online only savings account with a 3.15% interest rate is nothing to sneeze at, and they are partially responsible for Grameen bank starting up.

    moniker on
  • FencingsaxFencingsax It is difficult to get a man to understand, when his salary depends upon his not understanding GNU Terry PratchettRegistered User regular
    edited February 2009
    Yeah, I think the key here is that it's low relative cost to (generally) high relative benefit.

    Fencingsax on
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