Tag Archives: Debt

Why Do They Spend What They Don’t Have?

I grew up with a piggy bank. My generation was told by parents that it is important to save “for bad times”.  When bad times never came and I grew up I started to get a different idea of saving and the value of money. Yet I never considered credit except for buying a home. This one belief is hard to change: “Don’t spend what you don’t have.”

Yet the business model of microfinance institutions (MFIs) is based on the wish Continue reading Why Do They Spend What They Don’t Have?

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Microfinance Reality Check

Microfinance promises a lot to many people. It depends on which promise we’re looking at: fight poverty, generate profits, provide financial services to the poorest, empower women, support entrepreneurs and create jobs.  Each has its own merits and each only provides a sliver of the “truth”. 

Take “fight poverty”. Only 50% of the loans are productive to start with. The other half don’t generate revenues and are used to buy food, pay school fees or medical bills. Obviously a non-productive loan is not considered a success in the narrow sense. But looking at the broader picture it might make sense to provide financial means to smoothen the income of the poor. And from an entirely different angle it is somewhat surprising that the poor repay their debts more easily than they save money beforehand.

Then there is the question of whom you ask: practitioners tend to have a more positive view based on anecdotes while quantitative researchers have a hard time proving positive impact and usually have to slice and dice the data to find impact, e.g. among rural female users of productive loans.

The existence of strong competition, market entry of traditional banks, new technologies and favorable regulatory environment all point to a potential success story, where efficient companies produce profits and operate in a sustainable manner.

To summarize: Microfinance services are helping, just not in the way microfinance’s foundational belief system says it does. If few clients actually use microfinance services in the way the original designers of microfinance programs expected them to, that doesn’t mean it is a failure. Microfinance does address the problem of income unpredictability. A stable, reliable source of credit, combined with savings, allows clients to meet their spending needs even as income ebbs and flows.

Hat tip to jaysupetran from Access Advisory for an in depth commentary oft the situation: Microfinance reality check.

(photo by Jovan J on Flickr)

Usury, no Interest or even Debt Relief?

According to Wikipedia “Usury is the practice of making unethical or immoral monetary loans that unfairly enrich the lender.” Some people went further. Historically, or rather religiously, even taking interest was frowned upon, to say the least. The image above depicts Jesus as he expells the usurars from the temple.

Thou shalt not give him thy money upon interest, nor give him thy victuals for increase.” (Leviticus 25:37 in the Old Testament)

“And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full.” (Luke 6:34 in the New Testament)

“O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed.” (Al-‘Imran 3:130 in the Qur’an)

To sum it up: usury was a no go, interest taking was frowned upon and a call for debt relief was issued in a number of ancient societies.

Debt forgiveness is mentioned in the Book of Leviticus, in which God councils Moses to forgive debts in certain cases every Jubilee year – at the end of the last year of the seven year agricultural cycle or a 49-year cycle, depending on interpretation.

Debt forgiveness was also found in ancient Athens, where in the 6th century BC, the lawmaker Solon instituted a set of laws which canceled all debts and retroactively canceled previous debts that had caused slavery and serfdom, freeing debt slaves and debt serfs.

In addition, the Qur’an supports debt forgiveness:

If the debtor is in difficulty, grant him time till it is easy for him to repay. But, if ye remit it by way of charity, that is best for you if ye only knew. (Qur’an 2:280 )

(Source: Wikipedia)

But how is this related to microfinance? Interest rates lower than from informal moneylenders, suicides of credit defaulters, debt relief are just a few hints.

(photo by lds.org)