"Microcredit Is Immune to the Irrationalities of Mainstream Finance."
Absolutely not. The hype made it seem like more money for microcredit is always better. But microcredit is actually more prone than conventional credit to overheating and bubbles. It suffers from two vulnerabilities: a general lack of credit bureaus to track the indebtedness of low-income people, which leaves creditors flying blind; and the irrational exuberance about microcredit as a way to help the poor, which has unleashed a flood of capital from well-meaning people and institutions.
Most of this cross-border capital flow -- some $3 billion in 2010 -- has gone straight into microloans rather than business-building activities such as training and computer purchases. The stock of outstanding microdebt has grown 30 percent or more per year in many countries. The pace has proved faster than some lenders and borrowers could safely manage. In Nicaragua, after a nationwide debtor's revolt won backing from President Daniel Ortega, the tide of defaults destroyed one of the largest microcreditors, Banex. In the last five years, bubbles have also inflated and popped in Bosnia-Herzegovina, Morocco, and parts of Pakistan. In the short run, that has been good news for borrowers who took loans and then defaulted. (After all, if the lenders lost a lot of money, that money went somewhere!) But in the long view, damaging the industry reduces access to finance.
Then there is the Indian state of Andhra Pradesh, where, before the overheated market could implode on its own, the state government in 2010 essentially shut down the industry overnight. Visiting shortly afterward, I learned of villages where microcreditors were so plentiful that they were known by the day of the week on which their clients gathered to get loans and make payments. Some women had loans for every day of the week.
The bottom line: Microfinance is no silver bullet for poverty, but it does have things to offer. The strength of the movement is not in reducing poverty or empowering women, but in building dynamic institutions that deliver inherently useful services to millions of poor people. Imagine your life without financial services: no bank account, no insurance, no loans for a house or an education; just cash in your pocket or under your mattress. Poor people transact in smaller denominations, but they have to solve financial problems at least as tough as yours. They need and deserve such services too, just as they do clean water and electricity. The microfinance movement is about building businesses and business-like nonprofits that mass-produce financial services for the poor -- not just microcredit, but microsavings, microinsurance, and micro money transfers too.
The well-meaning flood of money into microcredit distorts the industry toward overreliance on this one, risky service. It is the greatest threat to the greatest strength of microfinance as a whole. That is why the hype about microcredit has been not merely misleading but destructive. And that is why less money should go into microcredit, not more.
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