My micro-credit essay with Karol Boudreaux

by on January 9, 2008 at 7:28 am in Economics | Permalink

From the Wilson Quarterly of this January, here is one excerpt:

For better or worse, microborrowing often entails a kind of ­bait ­and ­switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such ­life­saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the ­alternative–­such as no doctor’s visit for a child or no school for a ­year–­is much ­worse.

The piece attempts to redress many myths of micro-credit.  For instance it is often claimed that micro-credit doesn’t involve collateral, but that isn’t quite true.  The borrowing is done in small groups, and if you don’t pay your share the neighbors come and take away your TV set.  In reality micro-credit takes the collateral-seizing function away from the bank and puts it in the hands of our neighbors, thereby increasing loan repayment rates.

My favorite part of the piece is this:

Sometimes microcredit leads to more savings rather than more debt. That sounds paradoxical, but borrowing in one asset can be a path toward (more efficient) saving in other ­assets.

…Westerners typically save in the form of money or ­money-­denominated assets such as stocks and bonds. But in poor communities, money is often an ineffective medium for savings; if you want to know how much net saving is going on, don’t look at money. Banks may be a ­day­long bus ride away or may be plagued, as in Ghana, by fraud. A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. It creates other kinds of problems as well. Needy friends and relatives knock on the door and ask for aid. In small communities it is often very hard, even impossible, to say no, especially if you have the cash on ­hand.

Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable ­meat or simply eaten. With a small loan, people in rural areas can buy that cow and use cash that might otherwise be diverted to less useful purposes to pay back the microcredit institution. So even when microcredit looks like indebtedness, savings are going up rather than down.

In other words, read Keynes’s chapter 17, go long on animals (liquidity premium exceeds carrying costs), go short on money (carrying costs exceed liquidity premium, at least in poor countries), and increase your future expected net wealth.

1 JB Jacobsen January 9, 2008 at 8:42 am

I wonder if this trend will continue until we have micro-credit derivatives as well.
http://in.rediff.com/money/2007/dec/28bse.htm.

2 R January 9, 2008 at 10:42 am

I volunteered for a micro-credit NGO for a school term, basically going over their datasets looking for interesting or useful things and noticed a strong relationship between getting a micro-loan and increased gold or jewellery purchases in 6 months time. The project was in Yerevan, Armenia so animals were out for most recipients. I think for people without access to financial institutions gold or jewellery served as a more convenient savings system.

3 The other Eric January 9, 2008 at 12:18 pm

Steve, Keynes refers to The General Theory of Employment, Interest, and Money by
John Maynard Keynes of which chapter 17 is one of 24 tortuously written, nearly unreadable chapters. Keynes, loved by Marxists, socialists, and totalitarians of every stripe, built macroeconomic theory with a foundation of high taxes and state-controlled, high level planning. His ‘great work’ crams 8 to 10 pages of coherent ideas into 384 pages of chaff.

I don’t really appreciate Keynes, by the way.

4 Tim Worstall January 9, 2008 at 2:05 pm

“For instance it is often claimed that micro-credit doesn’t involve collateral, but that isn’t quite true.”

A point I’ve been trying to make for years. Your collateral is really your social reputation with the fellow borrowers in your group. Your social capital rather than physical or financial.

5 Sophie January 9, 2008 at 2:54 pm

Microcredit also exists in many countries due to lack of property rights. If you cannot own the ground your home is built on, you do not have access to regular credit to finance a business. Hernando de Soto’s book, The Other Path, helps to put the economic challenges facing citizens in developing nations into some perspective.

6 Asif Dowla January 9, 2008 at 4:54 pm

Very often it helps keep borrowers from even greater catastrophes, but only rarely does it enable them to climb out of –poverty. Very often it helps keep borrowers from even greater catastrophes, but only rarely does it enable them to climb out of –poverty.

Microcredit is not a panacea. One should not expect microcredit alone to help get the poor out of poverty.

Let us hear from the horse’s mouth, “Micro-credit is not a miracle cure that can eliminate poverty in one fell swoop. But it can end poverty for many and reduce its severity for others. Combined with other innovative programs that unleash people’s potential, micro-credit is an essential tool in our search for a poverty-free world.†Yunus, Muhammad. 2003 Banker to the Poor: Micro-lending and the Battle Against World Poverty. New York: Public Affairs. P.171.

Poverty is a multi-dimensional problem and hence need multi-faceted intervention. Micro credit under good infrastructure, political stability and good macroeconomic environment will help to alleviate poverty. See my next response.

Bangladesh, where Grameen Bank was born, is still a desperately poor country. The more modest truth is that microcredit may help some people, perhaps earning $2 a day, to earn something like $2.50 a day.

The rate of decline in poverty in Bangladesh has doubled from one percent to two percent in the last decade. Here is the link to the story

http://www.twocircles.net/2007aug28/world_bank_appreciates_bangladesh_success_poverty_reduction.html

The story is based on latest work about poverty reduction in Bangladesh by the World Bank (“Trends and Patterns of Poverty in Bangladesh in Recent Years† by Ambar Narayan, Nobuo Yoshida, and Hassan Zaman). The World Bank claims that Bangladesh has the potential to join the club of middle-income countries.

“Bangladesh now has one of the fastest rates of poverty reduction in South Asia. In 1991, 57 percent of Bangladesh’s population was living below the poverty line. By 2000 this number came down to 49 percent. Over the period 2000 to 2005, the poverty rate further declined to 40 percent with around six million people lifted out of poverty†
Source: http://go.worldbank.org/MKYF4IP0O0

Granted such reduction in poverty is not due to proliferation of microcredit alone. The reduction is caused higher economic growth caused by a troika or health remittances, export of garments and microfinance.

In the Tanzanian capital of Dar es Salaam, Joel Mwakitalu, who runs the Small Enterprise Foundation, a local microlender, told us that 60 percent of his loans are used to send kids to school; 40 percent are for investments. A study of microcredit in Indonesia found that 30 percent of the borrowed money was spent on some form of –consumption.

Cambridge economist Partha Dasgupta captured this distinction between consumption in rich and in poor countries aptly, “At low levels of nutrition and health care, increase in current consumption improve future labour productivity: if nothing else, morbidity is reduced. For example, Pitt and Rozenweig (1985) observed from Indonesian data that an increase in the consumption of fish, fruit, or vegetable by 10 percent reduces the chances of illness there by 9, 3 and 6 percent respectively.† (Well-being and Destitution, 1993, p. 247).
Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable –meat or simply eaten.

The top item of loan use by Grameen Bank borrowers is for milch cows ( A cow in milk or yielding milk; a cow bred or kept for milking, source: Oxford Electronic Dictionary) and Forty-four percent of the bank’s loans are invested in agriculture, livestock, and fisheries. Grameen Bank, Annual Report—2003 (Dhaka:Grameen Bank), p. 24.

For further information, please consult, Dowla, Asif and Dipal Barua, “The Poor Always Pay Back: The Grameen II story” published by Kumarian Press

7 Colin Danby January 9, 2008 at 4:59 pm
8 ZBicyclist January 10, 2008 at 12:15 am

Thanks to everyone here for informative posts.

I, for one, feel a lot better about microcredit now that I can see better how it works and how it fits into established systems.

To crib from Dickens, if microcredit can move a fair number of people from $2 a day (expenses $2.10) to $2.50 a day (expenses $2.40), that’s a big accomplishment.

9 Hope January 11, 2008 at 11:01 pm

“…a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money.”

While this is generally true, using farm animals as a medium for saving exposes the rural poor to correlated risk brought by natural disasters. A severe drought, for instance, that destroys crops as well as fodder will render a cow useless. The farmer is compelled to sell his cow, but so are all the other poor farmers, and the animal looses most of its value. This lumpiness of the asset is a real challenge for the rural poor and those in the business of helping them. (Innovative risk transfer mechanisms such as index-based insurance have been piloted in some low-income countries to address this issue, but that is another topic.)

10 Hope January 11, 2008 at 11:02 pm

“…a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money.”

While this is generally true, using farm animals as a medium for saving exposes the rural poor to correlated risk brought by natural disasters. A severe drought, for instance, that destroys crops as well as fodder will render a cow useless. The farmer is compelled to sell his cow, but so are all the other poor farmers, and the animal looses most of its value. This lumpiness of the asset is a real challenge for the rural poor and those in the business of helping them. (Innovative risk transfer mechanisms such as index-based insurance have been piloted in some low-income countries to address this issue, but that is another topic.)

11 Suffering Groups November 26, 2008 at 10:20 am

SUB : AN APPEAL FOR JUSTICE TO SAVE FROM OPPRESSIVE LAWS

Dear Sir,
From 1972 after independent, Bangladesh Nationals started to establish Industries investing family resources ,using Innovative Technology as self earner to achieve Economic Freedom & to create jobs for millions of unemployed when almost everything was damaged due to Liberation War and These Entrepreneurs are commonly know as 1st ( first ) Generation Industrial Entrepreneur of Bangladesh
Government also started to help these fast growing PRIVATE SECTOR INDUSTRIES AS IMPORT SUBSITUTES and for EXPORT having fund from International Loan Giving Agencies which were distributed through different Banks from 1979
Unfortunately the Owners of these Industries became helpless victims of deep rooted conspiracy and Anti Propaganda. The Bank officials refrain themselves from ascertaining production capacity of imported machineries and to provide required working capital loan in time extending non-cooperation harassment, negligence and fraudulent activities. And all these have been done willingly just to jeopardize the Government Industrial policy as well to terrorize the Owners of Industries of Private Sector finally to occupy the Mortgage Properties of the owner of the Industries under Private Sector.
Due to such activities Hundreds and Thousands of Industries were destroyed by Bank Officials and Policy Maker.
Over and above capitalizing the Illiteracy, Ignorance and Extreme Poverty of Bangladesh Citizens .Most of these laws were forced upon the Citizen including, Owner of the Industries of Private Sector in co-operation with their alliances who are busy to convert Bangladesh a Bottom less Basket Again
Due to such activities most of the Industries have became in-operatives and have lost their Cash Capitals, Expatriate Capabilities and became helpless victims of oppressive laws. Due to absence of minimum accountability from Banking Sector to the office of Land Survey Departments / Directorate.

In 1992 & 1996 Government of Bangladesh identified and registered many Industries as SICK INDUSTRIES declaring not as Defaulter of Bank Loan but victims of Violation of Contract , Negligence , Fraudulent or Malpractices of Bank Officials. And Policy Maker due to Lack of Accountability. And the matter of Lack of Accountability at every stage of Bangladesh is no more a hidden Matter.
THE HELPLESS OWNERS OF INDUSTRIES ARE LOOKING FOR JUSTICE, BUT THE DOOR OF JUSTICE ARE CLOSED Due to Enactment of a Law Know as ARTHA RIN ADALAT ACT ( Bank Loan Recovery Act ) on 1989 which were also amended on 2003 and 2007 . Bank Ruptcy Acts were also enacted on 1997 treating the Owners of Industries under Private Sector like as Slave of Colonial Period WHEN THE HANDS OF THE PRODUCER AND TECHNICIAN OF MOSLIN FABRICS ( which were only produced in Bengal of undivided INDIA) were cut down to stop production of Finest Fabrics by Bengali Technicians and Producer.
But surprisingly the ARTHA RIN ACT are not applicable for Nationalized or State Sector .where BILLIONS OF DOLLARS are spend till today without any accountability.

Out of Total of outstanding defaulted Bank Loans, about 60 to 70 % are lying with Nationalized / State Sector and less then 10 % are lying with Small and Medium sized Industries of Private Sector of Bangladesh. And Bank Official can explain well about the remaining of the Loan Amount.

THE LAW OF TORTS & LAW OF CONTRACT ARE MOST COMMON, BUT APPLICATION OF THE SAME ARE RESTRICTED IN BANGLADESH .
Due to which BANGLADESH HAS BECOME A HEAVEN FOR REPRESSION / EXPLOITATION Forcing the process to increase Poverty line in Geometric Ration & also helping the process of Lawlessness and Human Trafficking .
The Owners of Industries of Private Sector can not claim any set – off or compensation on the same suit as filed by BANK OFFICIALS or THE LOAN GIVING AGENCIES for Loan Recovery under Artha.Rin Act . for VIOLATION OF CONTRACT , NEGLEGENCES , Malpractices of Bank officials / Policy Maker.
AS A RESULT NUMBER OF SICK / DISTRESSED INDUSTRIES are increasing in every year due to complete lack of accountability of Bank Officials and Policy Maker .
BANK OFFICALS / LOAN GIVING AGENCIES HAVE BEEN ALLOWED TOTAL INDEMNITY OF LAW for violation of contract , negligence, Fraudulent Activities , . These have been done to hide out existing high profile malpractices and corruptions as per opinion of Expert Personals.

The Owner of Industries of Private Sector have no Legal Right to protect themselves from the oppression of Bank Officials & Policy Maker and these are no more hidden matter ,rather a part of the on going conspiracy to make Bangladesh a Bottom Less Basket.
Although in neighboring countries Like INDIA where there is LAW FOR LOAN RECOVERY KNOWN AS “ DEBT RECOVERY TRIBUNALS ( DRT )† where the Owner of Industries or other borrowers are allowed to claim Set off or Compensation in same suit and same court at same time.
But in BANGLADESH Owner of Industries or Other Borrowers of Bank Money are completely deprived of any such opportunity rather provision have been to hide out corruption , negligence, fraudulent activities of Bank Officials as per opinion of Expert Personals giving TOTAL INDEMNITY OR LICIENCE FOR UNENDING CORRUPTION OR MAL PRACTICES & Violation of Contracts & negligence .,
And Owner of Industries or Borrowers of Bank loans are completely deprived of any type of JUSCTICE. Common people are also facing another type of repression UNDER CERTIFICATE CASE for realization of Government Taxes . small loan of farmers , weavers etc ,
Industrial Entrepreneurs can only file a separate suit for compensation in a separate Civil Court which will be a matter of life long litigation .with no result .
As per Artha Rin Act nothing can be raised against the Order or Decree of Artha Rin Court to Higher Court and also without Payment of 50 % of the suit value or Decretal Amount,
The door of appeal or revision are closed denying the Legal right of Owners of Industries. As per Sections 12, 12 ( kha) , 18(2) & (3) , 19, 20,21,33, 34,40,41,42,44, 47 and 50 of Artha Rin Act.
And these are contradiction of ARTICLE 8, 15, 26, AND 27 of BANGLADESH CONSTITUTION AND THE GOVERNMENT INDUSTRIAL POLICY AS ADOPTED TIME TO TIME .
There are no other alternative way , but to draw the attention of concern authority of Bangladesh including PATRIOT INTELLECTUAL PERSONS AND LEADER OF CIVIL SOCIETY AND INTERNATIONAL COMMUNITY TO VERYFY the above and help for restoring EQUAL RIGHT for JUSTICE . and to help to Protect the Owner of Industries including Workers and other supporting Staffs who are already in Distressed Condition due to lapses of Policy Maker an Bank Officials and of the Oppressive Laws .
And to help to restore the accountability in all organizations including BANKS & other Loan Giving Agencies for the greater Interest of Nations please Circulate our humble appeal among Honorable Members , Partners of your organizations or in your News Bulletins and in Printed or Electronic News Media for Transmission this appeal among all organizations working for HUMAN RIGHT , DEMOCRATIC RIGHT and to PREVENT LEGAL ABUSE and OPPRESSIVE LAWS and also to consider the followings :

1-. Humble Appeal before the Government of Bangladesh to allow Owners of Industries to claim SET OFF or COMPENSATIONS for Negligence , Violation of Contract , Fraudulent or Malice Activities when the Bank Officials file any suits for recovery of Loan similar to DRT ( DEBT RECOVERY TRIBUNALS ) OF INDIA

2- Considering the heavy Loss / Damages of Government Registered & Identified SICK INDUSTRIES of 1992 & 1996 of Private Sector may be allowed 100 % weaver closing all Pending Suits for recovery of Loan unconditionally .

3- The Existing System of Mortgage of Landed Properties .for getting Loan need to be completely abolished .to remove ever growing corruption , malpractices and fraudulent Activities which exist in Banking Sector and are much Proven Facts for the greater national interest.

4- All pending suits in Atrha Rin Court may kindly be transferred to Civil Commercial Court abolishing Sections 12, 12( kha) , 18(2) & 18(3), 19,20,21,33, 34,40,41,42,44,47 and 50 of Artha Rin Acts including Sections 28 ( Ks) of Banking Company Acts , Creating Democratic Opportunities similar to DEBT RECOVERY TRIBUNAL S ( DRT ) of INDIA for the end of JUSTICE.

5- And to take immediate steps to abolish the system of CERTIFICASE CASE which are nothing but abuse of LAW and worst one like that of COLONIAL RULE .

Suffering Groups of Owners of Industries of Bangladesh.

12 rebecca May 15, 2009 at 11:23 pm

it is not bad

13 doshimaitri December 19, 2009 at 5:49 am

It may be true that in the poor communities there may be a problem of savings of the money,but now there has been also awakeness in them about a small amount of savings so that it can be used not in future but for the day to day basis.Again it can also happen that instead of buying a cow if they buy any machines or any useful product by borrowing a loan form thebank or the private companies which can be useful to them and work can be completed by their ladies/older one’s in their house so that if the savings are generated they can use for the repayment of the loan on which the machine was borrowed,again after repayment of such loan another useful items can be purchased and the cycle continues so if there is no cash in hand and no chances of stolen money,or lending to others if they want it for help.Again a cow may die after a period but a non living item does not.In market there are so many types of
loan leads
available so to get loans at very easy steps and also less amount of the interest.

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