Is micro-credit really working?

by on December 6, 2008 at 5:25 pm in Economics | Permalink

Tim Harford has a very good piece in today’s FT and he says yes:

Karlan and Zinman wanted to know what value there might be in
expanding access to credit. ZaFinCo was no dewy-eyed social business,
but a hard-nosed, profit-minded company, charging 11.75 per cent per
month on a four-month loan, or 200 per cent APR, much more than
Compartamos was generally judged to have been charging.

the high rates, the results were astonishing. "We expected to see some
good effects and some bad," explained Karlan, who checked in with the
experiment’s participants six to 12 months after they had filed their
initial loan applications. "But we basically only saw good effects."

strikingly, those "treated" by the experiment – that is, those for whom
the computer requested a second chance at a loan – were much more
likely to have kept their jobs than the control group. They were also
much less likely to have dropped below the poverty line or to have gone
hungry. All these outcomes were recorded well after the loan had been
taken out and (usually) repaid, so this was not measuring a temporary
debt-funded binge.

This seems mysterious. How can a loan at 200
per cent APR help people to stay out of poverty? One answer is that
most people turned down for a 200 per cent APR loan would be able to
get one at 300, 500 or over 1,000 per cent from an informal
moneylender. More important is that these loans were not used to start
businesses but to help people keep jobs that they already had. If a
smart new blouse or a spare part for the family moped is what it takes
to stay in work, then who is to say that an expensive loan isn’t a wise

1 Anonymous December 6, 2008 at 7:53 pm lets you participate in microcredit lending. And the borrowers in the developing world pay much less than 200%.

2 babar December 6, 2008 at 10:42 pm

i think there is some bayesian way of controlling for unobservables?

3 Ray G December 6, 2008 at 11:46 pm

attractive return for the investors

Not recognizing how important this is eventually dooms those who miss it.

4 happyjuggler0 December 7, 2008 at 4:16 am

The folks behind Oreo (I am too lazy to look up the parent company) made some adjustments upon encountering the Chinese market. One such adjustment was reducing the amount of Oreos in a package and selling at a commensurately lower price.

The point here is that poor people carry only so much cash, and fit in well with the proverbial “paycheck to pacheck” lifestyle that some poorer people in developed countries have.

As the quoted examples above regarding blouses or mopeds point out, how do such truly poor people (as opposed to US definition poverty where “poor” people have air conditioners and have a dietary problem of too much food) manage when they have a need for a large ticket purchase item or expense of some sort?

So yes, “usurous” rates of interest do indeed seem to be a win-win situation for poor people and their lenders. The proof is in the pudding, er, in the profits.

Yunus, at the interest rates he charges, actually has surplus profits (as I understand it anyway), which he then channels to his counterparties in social worker type aid, combined with paternalistic demands in return over lifestyles he thinks appropriate.

I have no trouble believing that a for-profit organization can actually make money at Yunus’ interst rates, and even at much higher rates. Anyone who thinks those rates are “too high” should put their money where their mouth is and compete those rates down.

5 quanticle December 7, 2008 at 8:27 pm

The thing is, 200% APR sounds really shocking, but, over a really short timespan (say, 1 month or so) the interest payments aren’t really that much.

As the article points out further past the quote, the real issue isn’t the interest rates, its the lack of transparency. What exactly are the interest payments being used to fund? How much are the administrative costs of getting this money to the people that are asking for it? Without that, microfinance will always have the smell of usury about it.

6 Kevin Marks December 8, 2008 at 1:36 am

How long before companies like Grameen, Kiva and ZaFinCo, who actually understand credit in adverse circumstances, set up shop in the US and do an Innovators Dilemma special on Citicorp et al?

7 Julie December 9, 2008 at 2:17 pm

I was in major debt 3 years ago. It completely ruined my life! Thankfully I found great help and thought I’d hopefully help someone get out of the same trouble that I was in.I am so glad and thankful I did it. The website I went to was ‘’ You will be so happy.

8 Ryan Calkins December 15, 2008 at 8:37 am

Microfinance is often painted with broad brush strokes that blur the distinction between the different types. MIX Market distinguishes between for profit, non profit, credit union, rural bank, and other minor categories. The interest rates vary amongst categories, as do the target markets. The for profits tend to target dense populations to keep loan administration costs down, while the non profits use other metrics for determining their target. In any case, Tim Harford’s article does a great job of illustrating the nuance.

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