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.
Actually you did make the point, which is why I alluded to it being an assumption of your point of view. The entire notion of your argument breaks down because of it.
If I was to translate it backward to something an exact equivalent - you get a $250k loan for your business/startup in SF but you spend it on feeding yourself/kids and paying rent because you absolutely have to do those things and you're struggling to pay your bills/rent & SF is damn expensive.
You don't exactly do that though with your 250k loan/predatory startup bond, though.
You're basically saying, albeit in a different frame of reference, the entity giving you the 250k loan is predatory because you are incentivised to pay your rent and you might be struggling to do so.
The assumption, once again, is the relative purchasing powers are different in the developing world vs your frame of reference.
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.
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.