Micro finance is definitely not “mostly a scam.” My dad is in the international development field, and was an early fan of Mohammed Yunus, the Bangladeshi economist who pioneered micro finance.
The article doesn’t do a good job proving its case. Looking at interest rates in isolation is meaningless. Is there any evidence these micro finance banks are achieving above-normal ROIs by exploiting people who need loans? Grameen Bank, one of the original micro finance institutions in Bangladesh, has a return on invested capital of around 6.5%. That’s not very high at all, especially considering the risky nature of their portfolio.
Well-meaning people worries about the notion of profiting from poor people are actually holding them back. Capital is what turns poor people into middle class people. Capital is what turned Korea from a poor country into a rich country. Foreign assistance, addressing healthcare, family planning, and education, helps catalyze the process. But all of that is pointless without capital. Foreign direct investment is one piece of that puzzle, and micro finance can be another piece of that puzzle.
If you read and want to refute the article, how do you counter the accusation that most of these loans are used for daily necessities and not for starting a business?
Why would a desperately poor person use a loan to start a business when they can't get enough for their children to eat?
Just in theory, a loan is only useful for someone who is already stable enough to think about long-term investments like starting a business. It doesn't help the hundreds of millions of people who don't have daily necessities.
> Looking at interest rates in isolation is meaningless.
Untrue. No one claiming to benefit the poor should ever charge, for example, 50% interest.
You might argue that the risk profile of these loans demands 75% interest, and 50% is a big discount by a nonprofit. That may be true, but it's still unbearable for people struggling to buy food and it still highlights the fact that loans are not a solution to systemic poverty in mismanaged countries.
> Capital is what turns poor people into middle class people.
Citation needed. Is capital fixing the poverty, or is capital arriving because something else has already started fixing the poverty?
The US and India have waged wars on poverty with success. These may have been boosted by capital, but they were not initiated or driven by it. As in all cases where poverty is alleviated, they were driven by grants and social programs.
In fact, the political interests of the holders of capital have reversed some of this progress.
You got to live in a poor country to understand the simple difference. These trivial sums are able to buy more capital goods than in a developed country.
A wheelbarrow is ~$2 vs ~$150. Microfinance is a game changer & its very visibly so.
Comments like yours are just so obviously from a developed country/western viewpoint because they basically assume the cost of life/goods/services is the same between the local market you live in vs the developing country with microfinance.
The basic refutation can come from a PPP basket of goods that goes even more basic to things people use every day. Flour, Chicken, i.e not a Big Mac index & not an equivalent goods-for goods comparison of the basket. There is no McDonalds in Nigeria fyi - the items of consumption are different too. The most expensive item in someone living in a developing country is typically phone airtime & never rent/mortgage which is probably your biggest outgoing in the developed world.
Even if capital isn't starting a business, simple things like a grant or loan to replace your thatch roof with a more expensive metal roof can reduce the amount of time & energy spent on daily survival and free up time & energy to invest in yourself.
Thatch roofs are cheap but require ongoing maintenance and harbor pests and fungi. It's the basically the African version of the boots theory of socioeconomic unfairness.
> you counter the accusation that most of these loans are used for daily necessities and not for starting a business?
The article cites “consumption loans” which are often for things like water sanitation or home repairs.
> It doesn't help the hundreds of millions of people who don't have daily necessities.
Being able to buy capital equipment can dramatically improve food production.
> No one claiming to benefit the poor should ever charge, for example, 50% interest.
Why?
> Citation needed.
See Bangladesh, India, South Korea, etc.
> Is capital fixing the poverty, or is capital arriving because something else has already started fixing the poverty?
Capital arrives because a country fixes certain basic rule of law, education, etc., issues. But foreign aid can’t lift a country from poverty into middle income status.
> The US and India have waged wars on poverty with success.
There is a very timely comparison to the situation in the US with the black-white income gap. It is the same today as back in the 1960s when the country was still legally segregated. Decades of government education programs, etc., haven’t had any effect on the gap at all. It obviously can alleviate suffering in the near term. But only the infusion of capital can actually change their financial condition meaningfully.
The same thing is true for Bangladesh. Don’t get me wrong: foreign assistance has been a boon in terms of helping reduce mortality rates and malnutrition, increasing education, etc. But that, by itself, can’t reduce poverty. Educated labor is useless if there is no capital. Bangladesh has received foreign aid for decades. But in the last 20 years, it has liberalized its economy and started receiving significant foreign capital. It has added $225 billion to its GDP since 2000. Foreign assistance could never accomplish that, because no country is going to be sending $225 billion to Bangladesh each year. You need to increase the production capacity of the local economy, and foreign investment of capital does that.
"Just in theory, a loan is only useful for someone who is already stable enough to think about long-term investments like starting a business."
It may seem obvious that someone who we consider to be poor, and to have unstable circumstances, has no use for a loan. I suggest you read 'Portfolios of the Poor'[0]. The book is based on financial diaries kept by people in precarious situations in poor countries. These diaries chronicle a surprising array of financial instruments used by people whose personal balance sheets are smaller than many HN readers' weekly snack budgets.
I think micro finance is largely undercut by the claims made about it in the 2000s. But if it's an important issue for you maybe it's worth reading the linked book (https://www.amazon.com/exec/obidos/ASIN/1609945182/)? The reviews seem fairly positive.
10 years ago out of college I helped set up some microfinance banks in Coffee producing communities in Honduras. At first your taken aback that people are paying 40%+ annual interest rates on small loans for these banks. But when your in the communities talking to people you realize their opportunity costs are like 400%+. Example is in most coffee producing communities in Central America farmers have to sell their products before they even grow them for 4-10x bellow the market rates if they just waited and banded together as co-op. Their issue is no access to financial products and they are substance farmers with no option but sell to coyotes to get money for food. In this world micro finance is a game changer in their quality of lives for it creates options
- if the opportunity costs are high, would it nonetheless not be better to have fair rates?
- if you believe in the market, why are there not already offers with more acceptable rates? Is there just not enough capital (which seems wrong, if you believe in your own claim that it's so profitable to invest), or because the risk is so high?
- most importantly, even if 40% was in fact an acceptable rate, what happens to those that can't repay? Say your crop is eaten by a bug or the local militia steals your harvest or you get injured and can't do the work - what happens to a poor person with a 40% loan? The answer is eternal, ever growing, unrepayable debt and suffering.
No thanks. This is not a kind gesture, this is Russian roulette - two chambers: you get even, two chambers: you make an enormous and sustainable profit, two chambers: your family is in debt for generations.
Before figuring out what rates are fair you should take all the variables into account, the big one is probably the default rate. If enough of these small businesses go out of business the survivors will have a more difficult situation as well because their loans will have to make up the shortfall. A typical default rate for these kind of loans is 5 to 10%, that's a lot of principal losses.
In a way, the finance part is the easy part. The borrowers do the research for you, so all you need to do is gatekeep the applications and write cheques. More advanced change, like setting up co-ops, improving relationships with suppliers and buyers, or product diversification to tap into non-local demand, is likely to be much more abstract, require much more hands on intervention, and will by necessity look more like charity work or statecraft than a quantifiable business venture.
Not to mention C Market price of coffee per lb is $1 on average and selling below that means the basically work for free! The opportunity cost of some $$ to maintain or build up a farm and institute good farming practices for higher quality / yield coffee makes sense because benefits are realized YoY off the first loan !
I personally think that this article is really just skimming the surface in the area some people broadly refer to as development work. Helping people toward sustainable, more independent situations is really difficult work, and there are a multitude of examples where even people with the best intentions did more harm than good, particularly when they blindly follow their own designs without paying specific attention to the people they're helping and the complex web of circumstances and history they live within. As the article detailed in the area of microfinance, there are unfortunately many people who shamefully further their own interests (money, reputation, etc.) in the guise of charity.
I really do think that applied correctly, microfinance is one tool of many that can be effectively applied for real good if it is not abused. The reason I think that is that in contrast to just giving someone something, microfinance can be more empowering in certain circumstances. In some development work, empowerment is a key ingredient to moving toward lasting change. I absolutely agree that there is potential for and are many examples of microfinance being used in harmful ways, but I think the same is true for just about every tool of development work. Even simply giving a person cash can be bad in some circumstances. This comes from my personal struggles in working a bit in the area of development as part of an organization that attempts to help people in lasting ways by leveraging a very limited pool of resources.
All that to say that I agree that microfinance is used to abuse people, but I don't think its use as such disqualifies it as a potential development tool.
Is it your experience that, when giving cash money as a donation/gift to a person does not result in positive consequences, giving a microloan to that same person produces different outcomes?
I assume that the people who use the (high interest) microloans for consumption would also use cash the same way, while those who use it to create a better future for themselves would do the same even when they don't have to pay it back.
Basically: is it the way/circumstances you got the money that makes the difference, or is the loan instrument just filtering out more of those that would "waste" it, because paying interest isn't attractive to them (and it wouldn't be 90% consumption credits, but 99.x% if there was no credit check and no interest)?
My experience does not include microloans, but I can clearly see the gap that they could fill in some of the situations I work through.
In many circumstances I encounter, financial need is a symptom of a deeper need that's harder to address and might even be exacerbated by financial gifts that aren't paired with something else to address the deeper need. Don't misunderstand. The financial needs in these cases are formidable with compounding impacts to be sure, but the root problem cannot be solved just by providing financial resources in the cases I'm describing. Satisfy a cash need and you can be only providing a bridge to essentially the same situation in the near future along with the despair of not being able to get out of the cycle yet again. By deeper needs I mean things like habits that need to change, mindsets that disadvantage, relational deficits, medical issues, etc. I also don't want to imply it's always primarily the person that needs to change. There are very real systemic issues in our society that need to be addressed for all to flourish.
Poverty is debilitating. Hope is important. When we can in our help identify real assets a person has (talents, passions, non financial resources, etc.) and empower them to be a part of the solution, there's hope there--they can act in a way that gets them to a better place. It might be assisted, but they're doing it. This is very important in many cases. If I take that same person and just impersonally satisfy their need, that can communicate they have nothing to offer, and it may reinforce problematic mindsets that are keeping them down.
Ultimately, microloans are just tools. All tools needs to be employed in the right way to be effective.
I long ago developed the opinion that most "innovations" in money and finance are scams whether intentional or not.
Money and finance are like power and water. They belong to a class of things that should be unbelievably boring, things you forget exist when they are working properly.
A related idea I developed from watching the cryptocurrency world is that it is really hard to have a financial system that is anything but gambling, Ponzis, and fraud. These are the paths of least resistance in finance, the things money seems to "want" to do. The vast maze of regulations in conventional finance are the outcome of a multi hundred year evolutionary battle to maintain at least some level of actual productive activity in the financial world.
The reason money "wants" to gamble and play Ponzi games is likely related to how human dopamine reward loops work. We get dopamine hits from gambling and are very prone to it, while productive investment is often too slow to deliver regularly spaced Skinner box rewards.
Paul Volcker (Fed chairman before Alan Greenspan, just died Dec 2019) famously quipped in the aftermath of the financial crisis that "the most important financial innovation that I have seen the past 20 years is the automatic teller machine"...
Financial instruments are always created to benefit one side more than the other. That in itself is fine.
The problem becomes when the side that disproportionately benefits also has an imbalance of power to pull the rug out from the other side. They are incentivized to be less than transparent.
It's almost always due to a misrepresentation of risk, which people seem to be keen on if they can pass that risk downstream, and the least informed end up holding the bag.
Finance is always gambling, ponzis, and fraud. But hey, that's not a bad thing.
Gamblers add liquidity, which is better for society than them hiding in a basement playing cards.
Stocks are essentially ponzi scheme financing. They have all the hallmarks. Then often literally use the cash from sales of stock to pay dividends. Most companies will never pay dividends, though, so the idea for a purchaser is to hold on and cash out while it's big before everyone else does.
Fraud is the worst when people have an expectation of trust, assuming they're protected by regulators. They never are. Madoff. Bre-X. Enron. Even highly regulated markets are always riddled with fraud. People should expect the market to be riddled with fraud and act accordingly - it keeps the populace wise.
Regulations are an attempt to get something for nothing which always just ends up with a bunch of friction, corruption, barriers to entry, and lawyers.
Your characterization of stocks is just wrong. The definition of a ponzi scheme is that the returns are paid by new investors but when a company is buying back shares it is earning that money by providing a service or selling a product. That product or service is purchased by a customer, not an investor. Money is coming from outside the company.
What you are misunderstanding is that the difference between paying dividends and a stock buyback isn't that great. Both mechanism distribute money owned by the company to shareholders. With dividends you simply receive a payment. With stock buybacks you get the ability to sell the stock back to the original company instead of selling the stock to another investor.
Think about it this way. The company has a valuation of 50 billion dollar. It is buying 1 billion dollar worth of stock back every year. After 50 years the company owns itself and every investor has been paid back. Of course this is an oversimplification but it shows that even if you hold onto your stock after everyone else has "cashed out" you can still earn your money back by selling the shares to the company.
The problem with micro finance is that it’s not scalable.
It takes effort and energy to setup in a certain location, and then will take the same effort and energy to setup in another location (minus some minuscule efficiencies), because what’s key in micro finance is understanding the needs of each individual community and catering to that.
If micro finance was scaleable, that would imply the same strategies would be broadly profitable across a range of communities. But at that point there is no need for micro finance. Regular banking entities could, and would, have stepped in and made money.
Not being scalable is much less of a problem when you want to make a living and help people than when you want to make lots and lots of money.
Because of that and because labor is cheap in most places where micro-finance makes sense, I would think not being scalable isn’t a huge problem for micro-financing.
Scalability isn't the issue. It's just not profitable. Microlending is a money loser overall. Dirt farming just isn't very profitable on the scale of a wealthy investor in a developed country. It only works because the lenders think of it as gifts that are partially refunded, not investments.
Good micro lending options do exist, Kiva has a great track record[1].
My perspective, the exploitive micro lending options exist due to lack of financial education in our K-12 primary schools globally.
Teaching the average student the fundamentals of accounting and finance would be much more practical than trigonometry or pre-calculus. For base IRR, NPV, DPP, etc. algebra 1 is plenty of a mathematics foundation to complete.
The marketing says they are good, but the point of the article is that the marketing is often untrustworthy. What are Kiva's local partners hiding from them and does Kiva watch over them closely enough to find out when something is going wrong? It seems like we aren't in a position to know?
Kiva indicates I have been using them for 8 years (2012); 75 countries/territories, 15 sectors, 163 activities and 258 field partners (the company on the other side processing the loan in country is the field partner to which you're referring). My lend focus is primarily agriculture, infrastructure education and other back end type microloans as opposed to finished goods and services typically for front end selling (a long time ago there was another website just for education, they merged with Kiva many years ago).
Stats as of today: Delinquency rate 29.40%, Defaulted rate 7.67%, Currency loss rate 0.04% - the webUI indicates my Delinquency rate is higher than average (20.70%), same with Default rate (1.76%) but Currency loss much lower than average (0.33%). Results from folks who lend in the sectors I do not may have wildly different results...
Exactly. Kiva doesn't give out the loans itself, but uses partner organisations. And IIRC they have cut ties with several of these due to various scandals, though a quick search hasn't yielded any reputable source. Maybe that means that the due diligence process (ultimately) works...
> It’s a nice story, but of course it means, even in this best case, that the people around her who had previously done what she now does have been pushed out of business. They need to find a new job.
This is the lump of labour fallacy[0]. There’s a whole body of economic theory but generally arguments against the fallacy are that lowering prices is likely to increase demand (so competitors could make the same investment and compete for the increased demand and be better off as a whole; productivity increases may lead to new ancillary or similar products that were previously not cost effective to produce, again increasing the pie; those increasing their income have to invest or spend it, so those put out of business could start a new business taking investment or spending from their previous competitor. Reality is obviously much more complex and definitely in the short term it can lead to real misery for those losing the competition and not having the time or savings to wait for a new job or for an investment to start paying off. But that doesn’t mean that we should just stop innovation and stop trying to become more productive.
The rest of the arguments in the article against micro finance seem to be issues with underperforming legal and governmental institutions that fail to prevent and remedy fraud and abuse of people in precarious situations. In these systems/countries, there will always be fraud and abuse no matter how you try to help people (including charity, starting real companies and trying to give people real jobs with reasonable pay).
That doesn’t mean you should stop these initiatives. Hopefully, improving conditions for individual people will help improve systemic conditions and vice versa.
You have to be making some awfully specific assumptions about what the article is claiming in a throwaway sentence to conclude that it's a lump of labor fallacy. I don't see the article committing itself to a broad argument about the theoretical fungibility (or lack thereof) of labor just because it was noting that the workers need to find new jobs. There's a huge personal cost to the workers.
>and definitely in the short term it can lead to real misery for those losing the competition and not having the time or savings to wait for a new job or for an investment to start paying off
Yes, exactly. That's a reasonable interpretation of what's being said.
>But that doesn’t mean that we should just stop innovation and stop trying to become more productive.
> But that doesn’t mean that we should just stop innovation and stop trying to become more productive.
But that's also not what he's saying, is it? It absolutely makes sense to innovate and automate anything if labor is costly because it's in short supply. But when it's not? Isn't that then similar to the Softbank Ventures that seem to follow "spend an insane amount of money, hope that nobody else tries to match it, get to monopoly status, extract insane amounts of profit"? Invest a lot, massively undercut the competition, drive competition out of the market, turn on the profits.
But, unless that labor is needed, or at least can be used, somewhere else: what is won?
The lump of labour fallacy is a result of human nature and how we organize work. Because each person can only work at a single job the loss of the job is devastating.
If you were to model a country as a single person but with the productivity of 1000000 people working 20000 different jobs then that person would complain about spending way too much time on a handful of jobs. e.g. "Too much time is spent on farming! I don't have enough time to work on my boat!" Decreasing the time spent on farming will free up time and that time can be spent on building a boat. It's clear that increasing productivity will always benefit the entire society.
The real problem is that inequality keeps growing. Especially since modern productivity improvements are often not tied to the experience or skill of the worker but rather they are dependent on investments in tools and machinery. Those tools are not owned by the worker, they are owned by the company. However, competition eventually reaches a point where the industry loses its profit margins and most of the revenue is passed onto workers or at least the workers that built the machinery and tools. But the reality remains that first mover companies make a killing with automation and acquire lots of capital.
Another factor is full employment. As we get closer to full employment the consumer inflation index will rise and capital will lose its value compared to income.
There are mechanisms that slowly erode the negative effects of inequality but right now things are happening so quickly they have trouble catching up.
I was also put off by the casual assertion that if business A is successful it necessarily means some other business B is less successful. It’s a false premise.
I think "Microfinance is a scam" oversells the claim.
The truth is much closer to "Microfinance is payday loans". To the extent that you believe payday loans can help the poor in the developed world, microfinance can also help the poor in the developing world.
That's certainly true in American cities, where they are made to desperate people devoid of options for a whole host of reasons (systemic racism, regulatory capture, supply-side economic, etc.) Those conditions don't necessarily apply to impoverished countries where microfinance organizations target. They've got other problems, so microfinance may or may not work, but they're really not comparable to payday loans in the US.
Payday loans are also much shorter term. They're not intended as investments, even when they're not actively fraudulent. They're supposed to stave off literal starvation for people with unreliable income. Presenting them any other way is fraudulent, and people are often trapped in them by people who knew that they could not be paid back in time (and the compounding interest would claim everything they own).
The US was working on regulation to limit fraud in payday lending while still trying to keep the aspect of trying to even out inconsistent income. That was in 2016, and I think the new administration killed that.
People who believe that are ignorant of how much it costs to provide payday loans, or micro finance. They should be focused on increasing competition and offering the poor better options instead of just banning them.
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The article doesn’t do a good job proving its case. Looking at interest rates in isolation is meaningless. Is there any evidence these micro finance banks are achieving above-normal ROIs by exploiting people who need loans? Grameen Bank, one of the original micro finance institutions in Bangladesh, has a return on invested capital of around 6.5%. That’s not very high at all, especially considering the risky nature of their portfolio.
Well-meaning people worries about the notion of profiting from poor people are actually holding them back. Capital is what turns poor people into middle class people. Capital is what turned Korea from a poor country into a rich country. Foreign assistance, addressing healthcare, family planning, and education, helps catalyze the process. But all of that is pointless without capital. Foreign direct investment is one piece of that puzzle, and micro finance can be another piece of that puzzle.
Why would a desperately poor person use a loan to start a business when they can't get enough for their children to eat?
Just in theory, a loan is only useful for someone who is already stable enough to think about long-term investments like starting a business. It doesn't help the hundreds of millions of people who don't have daily necessities.
> Looking at interest rates in isolation is meaningless.
Untrue. No one claiming to benefit the poor should ever charge, for example, 50% interest.
You might argue that the risk profile of these loans demands 75% interest, and 50% is a big discount by a nonprofit. That may be true, but it's still unbearable for people struggling to buy food and it still highlights the fact that loans are not a solution to systemic poverty in mismanaged countries.
> Capital is what turns poor people into middle class people.
Citation needed. Is capital fixing the poverty, or is capital arriving because something else has already started fixing the poverty?
The US and India have waged wars on poverty with success. These may have been boosted by capital, but they were not initiated or driven by it. As in all cases where poverty is alleviated, they were driven by grants and social programs.
In fact, the political interests of the holders of capital have reversed some of this progress.
A wheelbarrow is ~$2 vs ~$150. Microfinance is a game changer & its very visibly so.
Comments like yours are just so obviously from a developed country/western viewpoint because they basically assume the cost of life/goods/services is the same between the local market you live in vs the developing country with microfinance.
The basic refutation can come from a PPP basket of goods that goes even more basic to things people use every day. Flour, Chicken, i.e not a Big Mac index & not an equivalent goods-for goods comparison of the basket. There is no McDonalds in Nigeria fyi - the items of consumption are different too. The most expensive item in someone living in a developing country is typically phone airtime & never rent/mortgage which is probably your biggest outgoing in the developed world.
Thatch roofs are cheap but require ongoing maintenance and harbor pests and fungi. It's the basically the African version of the boots theory of socioeconomic unfairness.
The article cites “consumption loans” which are often for things like water sanitation or home repairs.
> It doesn't help the hundreds of millions of people who don't have daily necessities.
Being able to buy capital equipment can dramatically improve food production.
> No one claiming to benefit the poor should ever charge, for example, 50% interest.
Why?
> Citation needed.
See Bangladesh, India, South Korea, etc.
> Is capital fixing the poverty, or is capital arriving because something else has already started fixing the poverty?
Capital arrives because a country fixes certain basic rule of law, education, etc., issues. But foreign aid can’t lift a country from poverty into middle income status.
> The US and India have waged wars on poverty with success.
False. https://www.vox.com/policy-and-politics/2016/12/29/14112084/...
https://www.brookings.edu/opinions/the-war-on-poverty-what-w...
There is a very timely comparison to the situation in the US with the black-white income gap. It is the same today as back in the 1960s when the country was still legally segregated. Decades of government education programs, etc., haven’t had any effect on the gap at all. It obviously can alleviate suffering in the near term. But only the infusion of capital can actually change their financial condition meaningfully.
The same thing is true for Bangladesh. Don’t get me wrong: foreign assistance has been a boon in terms of helping reduce mortality rates and malnutrition, increasing education, etc. But that, by itself, can’t reduce poverty. Educated labor is useless if there is no capital. Bangladesh has received foreign aid for decades. But in the last 20 years, it has liberalized its economy and started receiving significant foreign capital. It has added $225 billion to its GDP since 2000. Foreign assistance could never accomplish that, because no country is going to be sending $225 billion to Bangladesh each year. You need to increase the production capacity of the local economy, and foreign investment of capital does that.
It may seem obvious that someone who we consider to be poor, and to have unstable circumstances, has no use for a loan. I suggest you read 'Portfolios of the Poor'[0]. The book is based on financial diaries kept by people in precarious situations in poor countries. These diaries chronicle a surprising array of financial instruments used by people whose personal balance sheets are smaller than many HN readers' weekly snack budgets.
[0] http://www.portfoliosofthepoor.com/
The primary research it's based on: https://www.aeaweb.org/articles?id=10.1257/app.20140287
I think micro finance is largely undercut by the claims made about it in the 2000s. But if it's an important issue for you maybe it's worth reading the linked book (https://www.amazon.com/exec/obidos/ASIN/1609945182/)? The reviews seem fairly positive.
Deleted Comment
- if the opportunity costs are high, would it nonetheless not be better to have fair rates?
- if you believe in the market, why are there not already offers with more acceptable rates? Is there just not enough capital (which seems wrong, if you believe in your own claim that it's so profitable to invest), or because the risk is so high?
- most importantly, even if 40% was in fact an acceptable rate, what happens to those that can't repay? Say your crop is eaten by a bug or the local militia steals your harvest or you get injured and can't do the work - what happens to a poor person with a 40% loan? The answer is eternal, ever growing, unrepayable debt and suffering.
No thanks. This is not a kind gesture, this is Russian roulette - two chambers: you get even, two chambers: you make an enormous and sustainable profit, two chambers: your family is in debt for generations.
Sorry, hate to be reddit-esque here, but this auto correct was too funny.
I really do think that applied correctly, microfinance is one tool of many that can be effectively applied for real good if it is not abused. The reason I think that is that in contrast to just giving someone something, microfinance can be more empowering in certain circumstances. In some development work, empowerment is a key ingredient to moving toward lasting change. I absolutely agree that there is potential for and are many examples of microfinance being used in harmful ways, but I think the same is true for just about every tool of development work. Even simply giving a person cash can be bad in some circumstances. This comes from my personal struggles in working a bit in the area of development as part of an organization that attempts to help people in lasting ways by leveraging a very limited pool of resources.
All that to say that I agree that microfinance is used to abuse people, but I don't think its use as such disqualifies it as a potential development tool.
I assume that the people who use the (high interest) microloans for consumption would also use cash the same way, while those who use it to create a better future for themselves would do the same even when they don't have to pay it back.
Basically: is it the way/circumstances you got the money that makes the difference, or is the loan instrument just filtering out more of those that would "waste" it, because paying interest isn't attractive to them (and it wouldn't be 90% consumption credits, but 99.x% if there was no credit check and no interest)?
In many circumstances I encounter, financial need is a symptom of a deeper need that's harder to address and might even be exacerbated by financial gifts that aren't paired with something else to address the deeper need. Don't misunderstand. The financial needs in these cases are formidable with compounding impacts to be sure, but the root problem cannot be solved just by providing financial resources in the cases I'm describing. Satisfy a cash need and you can be only providing a bridge to essentially the same situation in the near future along with the despair of not being able to get out of the cycle yet again. By deeper needs I mean things like habits that need to change, mindsets that disadvantage, relational deficits, medical issues, etc. I also don't want to imply it's always primarily the person that needs to change. There are very real systemic issues in our society that need to be addressed for all to flourish.
Poverty is debilitating. Hope is important. When we can in our help identify real assets a person has (talents, passions, non financial resources, etc.) and empower them to be a part of the solution, there's hope there--they can act in a way that gets them to a better place. It might be assisted, but they're doing it. This is very important in many cases. If I take that same person and just impersonally satisfy their need, that can communicate they have nothing to offer, and it may reinforce problematic mindsets that are keeping them down.
Ultimately, microloans are just tools. All tools needs to be employed in the right way to be effective.
Money and finance are like power and water. They belong to a class of things that should be unbelievably boring, things you forget exist when they are working properly.
A related idea I developed from watching the cryptocurrency world is that it is really hard to have a financial system that is anything but gambling, Ponzis, and fraud. These are the paths of least resistance in finance, the things money seems to "want" to do. The vast maze of regulations in conventional finance are the outcome of a multi hundred year evolutionary battle to maintain at least some level of actual productive activity in the financial world.
The reason money "wants" to gamble and play Ponzi games is likely related to how human dopamine reward loops work. We get dopamine hits from gambling and are very prone to it, while productive investment is often too slow to deliver regularly spaced Skinner box rewards.
https://nypost.com/2009/12/13/the-only-thing-useful-banks-ha...
The problem becomes when the side that disproportionately benefits also has an imbalance of power to pull the rug out from the other side. They are incentivized to be less than transparent.
It's almost always due to a misrepresentation of risk, which people seem to be keen on if they can pass that risk downstream, and the least informed end up holding the bag.
Gamblers add liquidity, which is better for society than them hiding in a basement playing cards.
Stocks are essentially ponzi scheme financing. They have all the hallmarks. Then often literally use the cash from sales of stock to pay dividends. Most companies will never pay dividends, though, so the idea for a purchaser is to hold on and cash out while it's big before everyone else does.
Fraud is the worst when people have an expectation of trust, assuming they're protected by regulators. They never are. Madoff. Bre-X. Enron. Even highly regulated markets are always riddled with fraud. People should expect the market to be riddled with fraud and act accordingly - it keeps the populace wise.
Regulations are an attempt to get something for nothing which always just ends up with a bunch of friction, corruption, barriers to entry, and lawyers.
What you are misunderstanding is that the difference between paying dividends and a stock buyback isn't that great. Both mechanism distribute money owned by the company to shareholders. With dividends you simply receive a payment. With stock buybacks you get the ability to sell the stock back to the original company instead of selling the stock to another investor.
Think about it this way. The company has a valuation of 50 billion dollar. It is buying 1 billion dollar worth of stock back every year. After 50 years the company owns itself and every investor has been paid back. Of course this is an oversimplification but it shows that even if you hold onto your stock after everyone else has "cashed out" you can still earn your money back by selling the shares to the company.
It takes effort and energy to setup in a certain location, and then will take the same effort and energy to setup in another location (minus some minuscule efficiencies), because what’s key in micro finance is understanding the needs of each individual community and catering to that.
If micro finance was scaleable, that would imply the same strategies would be broadly profitable across a range of communities. But at that point there is no need for micro finance. Regular banking entities could, and would, have stepped in and made money.
Because of that and because labor is cheap in most places where micro-finance makes sense, I would think not being scalable isn’t a huge problem for micro-financing.
My perspective, the exploitive micro lending options exist due to lack of financial education in our K-12 primary schools globally.
Teaching the average student the fundamentals of accounting and finance would be much more practical than trigonometry or pre-calculus. For base IRR, NPV, DPP, etc. algebra 1 is plenty of a mathematics foundation to complete.
[1] https://www.kiva.org/about/impact
Stats as of today: Delinquency rate 29.40%, Defaulted rate 7.67%, Currency loss rate 0.04% - the webUI indicates my Delinquency rate is higher than average (20.70%), same with Default rate (1.76%) but Currency loss much lower than average (0.33%). Results from folks who lend in the sectors I do not may have wildly different results...
This is the lump of labour fallacy[0]. There’s a whole body of economic theory but generally arguments against the fallacy are that lowering prices is likely to increase demand (so competitors could make the same investment and compete for the increased demand and be better off as a whole; productivity increases may lead to new ancillary or similar products that were previously not cost effective to produce, again increasing the pie; those increasing their income have to invest or spend it, so those put out of business could start a new business taking investment or spending from their previous competitor. Reality is obviously much more complex and definitely in the short term it can lead to real misery for those losing the competition and not having the time or savings to wait for a new job or for an investment to start paying off. But that doesn’t mean that we should just stop innovation and stop trying to become more productive.
The rest of the arguments in the article against micro finance seem to be issues with underperforming legal and governmental institutions that fail to prevent and remedy fraud and abuse of people in precarious situations. In these systems/countries, there will always be fraud and abuse no matter how you try to help people (including charity, starting real companies and trying to give people real jobs with reasonable pay).
That doesn’t mean you should stop these initiatives. Hopefully, improving conditions for individual people will help improve systemic conditions and vice versa.
[0] https://en.wikipedia.org/wiki/Lump_of_labour_fallacy
>and definitely in the short term it can lead to real misery for those losing the competition and not having the time or savings to wait for a new job or for an investment to start paying off
Yes, exactly. That's a reasonable interpretation of what's being said.
>But that doesn’t mean that we should just stop innovation and stop trying to become more productive.
But I don't think this is.
But that's also not what he's saying, is it? It absolutely makes sense to innovate and automate anything if labor is costly because it's in short supply. But when it's not? Isn't that then similar to the Softbank Ventures that seem to follow "spend an insane amount of money, hope that nobody else tries to match it, get to monopoly status, extract insane amounts of profit"? Invest a lot, massively undercut the competition, drive competition out of the market, turn on the profits.
But, unless that labor is needed, or at least can be used, somewhere else: what is won?
If you were to model a country as a single person but with the productivity of 1000000 people working 20000 different jobs then that person would complain about spending way too much time on a handful of jobs. e.g. "Too much time is spent on farming! I don't have enough time to work on my boat!" Decreasing the time spent on farming will free up time and that time can be spent on building a boat. It's clear that increasing productivity will always benefit the entire society.
The real problem is that inequality keeps growing. Especially since modern productivity improvements are often not tied to the experience or skill of the worker but rather they are dependent on investments in tools and machinery. Those tools are not owned by the worker, they are owned by the company. However, competition eventually reaches a point where the industry loses its profit margins and most of the revenue is passed onto workers or at least the workers that built the machinery and tools. But the reality remains that first mover companies make a killing with automation and acquire lots of capital.
Another factor is full employment. As we get closer to full employment the consumer inflation index will rise and capital will lose its value compared to income.
There are mechanisms that slowly erode the negative effects of inequality but right now things are happening so quickly they have trouble catching up.
The truth is much closer to "Microfinance is payday loans". To the extent that you believe payday loans can help the poor in the developed world, microfinance can also help the poor in the developing world.
Payday loans are also much shorter term. They're not intended as investments, even when they're not actively fraudulent. They're supposed to stave off literal starvation for people with unreliable income. Presenting them any other way is fraudulent, and people are often trapped in them by people who knew that they could not be paid back in time (and the compounding interest would claim everything they own).
The US was working on regulation to limit fraud in payday lending while still trying to keep the aspect of trying to even out inconsistent income. That was in 2016, and I think the new administration killed that.
Sure.
And I think the same logic also clearly applies to microfinance.
I do however call into question the selling the term "microfinance" and its "mission to help" a scam against the people that backed it. Sure.
Wonder why a company wouldn’t offer to advance paychecks to workers, take a say 3% fee to pay 2 weeks early and pocket that fee.