I wish the team at Zidisha nothing but success, but I'm skeptical that micro-lending is a practical solution for relieving poverty in the developing world.
If a viable opportunity for making small loans existed, then I would expect local financial institutions to fill that need. When those institutions do not exist, there is usually a reason, such as the lack of an adequate legal and financial system for recovering debts. Without the ability to enforce payment obligations, the line between lending and charity becomes rather slim.
It's also unrealistic to expect most people receiving micro-loans to operate effective businesses, given their limited educations and lack of direct exposure to Western entrepreneurial values. Perhaps their living conditions could be improved more efficiently by a non-profit that gave away the right to operate franchise businesses using a proven model?
I don't have the expertise to know what kind of business would be optimal for people with limited resources. But when I see the success of immigrant-run franchises within the United States, I can't help but imagine that the underlying principle could be harnessed to generate wealth for needy people overseas.
That's a fair point. But my view is informed by my (limited) review of the scholarly literature on microfinance. I was impressed by the economist David Roodman, who has done a lot of work on how the actual empirical evidence suggests that micro-loans are not effective at relieving poverty.
I can say from personal experience that investing a lump sum of a few hundred dollars in a business that earns a couple dollars a day is often enough to double profits.
A lot of the overhead from 'traditional' microfinance (the model popularized by Mohammed Yunus in the 70's-80s) comes from creating social/community-based incentives for repayment, referred to as social capital. This is considered the alternative to regular loans since in non-collateral lending the borrower loses nothing monetarily if they don't repay.
According to their site, the repayment rate for Zidisha is under 50%... thats pretty dismal in an industry where you normally consider a healthy MFI (microfinance institution) to be operating at high 90 percentiles of repayment.
If a viable opportunity for making small loans existed, then I would expect local financial institutions to fill that need. When those institutions do not exist, there is usually a reason, such as the lack of an adequate legal and financial system for recovering debts. Without the ability to enforce payment obligations, the line between lending and charity becomes rather slim.
It's also unrealistic to expect most people receiving micro-loans to operate effective businesses, given their limited educations and lack of direct exposure to Western entrepreneurial values. Perhaps their living conditions could be improved more efficiently by a non-profit that gave away the right to operate franchise businesses using a proven model?
I don't have the expertise to know what kind of business would be optimal for people with limited resources. But when I see the success of immigrant-run franchises within the United States, I can't help but imagine that the underlying principle could be harnessed to generate wealth for needy people overseas.