Chapter 7
The Men from Kabul and the Eunuchs of India

It is apparently hard to be dispassionate about microcredit, which has been simultaneously presented as the biggest hope to eradicate poverty and the cause for multiple suicides of innocent borrowers

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The fact that banks are often unwilling to lend to the poor, coupled with the extremely high interest rates moneylenders charge, was a call to action for the founders of microfinance.
Enforcing credit contracts involves collecting extensive information about the borrower to ensure repayment. The high cost of gathering this information makes neighborhood moneylenders the easiest source of credit.
Microfinance institutions rely on their ability to keep a close check on the customer, in part by involving other borrowers who happen to know the customer: This was a recipe for enormous success, there are more than 200 million microfinance borrowers today.
Many MFIs were unwilling to evaluate whether their lending programs were helping the poor. The MFIs were financially sustainable and borrowers kept coming back, which the MFIs saw as proof enough.
When an Indian MFI, Spandana, was rigorously evaluated, there was clear evidence that microfinance was working. People in Spandana neighborhoods were more likely to have started a business and made large purchases.
However, there were no detectable impacts on women's empowerment, spending on education or health, or in the probability that kids would be enrolled in private schools.
One of the limits of microfinance is its inflexible structure and focus on "zero default." It may not be an effective borrowing channel for entrepreneurs who are willing to take risks and will go on to set up a large business.
More established businesses do not find it that much easier to get credit. In particular, they run the risk of being too large for the traditional moneylenders and microfinance agencies, but too small for the banks.
We need to see the equivalent of the microfinance revolution for small and medium firms; figured out how to do it profitably on a large scale is the next big challenge for finance in developing countries.

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Home › Chapters › 7 The Men from Kabul and the Eunuchs of India

The Men from Kabul and the Eunuchs of India

Sun, 01/30/2011 - 12:55 — admin
Short Title: 
The Men from Kabul

It is apparently hard to be dispassionate about microcredit, which has been simultaneously presented as the biggest hope to eradicate poverty and the cause for multiple suicides of innocent borrowers

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It is apparently hard to be dispassionate about microcredit, which has been simultaneously presented as the biggest hope to eradicate poverty and the cause for multiple suicides of innocent borrowers.

The truth is that microcredit is an extremely impressive social innovation: the movement has managed to find a way to lend to the poor at reasonable interest rates, against all odds, where many government efforts had previously failed. And it has real, if modest, effects on the lives of its clients. But it is not a silver bullet. In particular, it leaves open the next big challenge: how to lend to larger firms, so that microbusinesses can turn into viable enterprises.
 

Spotlight

Microcredit Is Not the Enemy
Abhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande, Raghuram Rajan / Financial Times / 13 December 2010

The microfinance sector in India is in deep crisis. Nine leading development economists co-authored op-ed pieces in the Financial Times ("Microcredit Is Not the Enemy") and the Indian Express ("Help Microfinance, Don't Kill It"). They argue that "microfinance fills a key need in developing countries like India: the provision of financial services to low-income clients who traditionally lack access to formal banking for several reasons."

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Chapter 7

It is apparently hard to be dispassionate about microcredit, which has been simultaneously presented as the biggest hope to eradicate poverty and the cause for multiple suicides of innocent borrowers.

The truth is that microcredit is an extremely impressive social innovation: the movement has managed to find a way to lend to the poor at reasonable interest rates, against all odds, where many government efforts had previously failed. And it has real, if modest, effects on the lives of its clients. But it is not a silver bullet. In particular, it leaves open the next big challenge: how to lend to larger firms, so that microbusinesses can turn into viable enterprises.
 

Spotlight

Microcredit Is Not the Enemy
Abhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande, Raghuram Rajan / Financial Times / 13 December 2010

The microfinance sector in India is in deep crisis. Nine leading development economists co-authored op-ed pieces in the Financial Times ("Microcredit Is Not the Enemy") and the Indian Express ("Help Microfinance, Don't Kill It"). They argue that "microfinance fills a key need in developing countries like India: the provision of financial services to low-income clients who traditionally lack access to formal banking for several reasons."