Comments on: Micro Finance & Open Source

By: Guan Yang

Guan Yang — Thu, 01 Jan 1970 00:00:00 +0000

This may not be very interesting to a empirical development practitioner like yourself, but I recently attended my microeconomics teacher’s PhD defense (viva). He did his PhD work on a theoretical and empirical framework for looking at subsidised lending in markets that are previously dominated by a moneylender — defined as a lender who has higher costs of finance than an official lender, but who has better information about credit risks and can enforce repayment (presumably because he can credibly issue the threat of physical violence).

Many microfinance institutions, such as Grameen Bank, are heralded as a form of sustainable development, but in reality they do not make any profits and require large subsidies every year to remain afloat and sustain their activities.

It turns out that the introduction of a subsidized lender disturbs the equilibrium in the market because it leads the official lender to attempt to lend to everyone, even people who should not receive credit (because of inability to repay or unsustainable business models). This again results in both the official lender and the unofficial moneylender going bankrupt.

By: Frank Pearce

Frank Pearce — Thu, 01 Jan 1970 00:00:00 +0000

Microcredit does not have to be subsidised to work. There are examples of informal micro-credit schemes that are organised by the participants themselves. Good practice in this industry should follow their examples.

By: Katrin

Katrin — Thu, 01 Jan 1970 00:00:00 +0000

Tomas — how very interesting that you are mentioning this. I just had a very interesting conversation at an international dev conference in Washington DC about the very topic. Among other people, I was talking to the guy who is putting on one of the key training sessions for microenterprise practitioners next month in my neck of the woods – see http://www.mdi-nh.org/ There are a couple of tracks on applications that I hoping to check out. I love to talk with you more — especially about the ‘poverty assessment’ tools that are needed in the new schema of focusing microfinance on those living in absolute poverty. It’s a complex field and I am by no means a domain expert here, but I think you are on to something pretty interesting — certainly something we here at Aspiration are looking at as well. Let me know whether you want to talk more — would be nice to reconnect anyway. I am on skypes, if that helps…

Katrin

By: Tomas

Tomas — Thu, 01 Jan 1970 00:00:00 +0000

Guan,

You are very wrong if you think this has no interest, merely because I
am a dabbling practitioner. I am extremely interested in this sort of
argument, just like I am extremely interested in any other constructive
critique of development work, especially when it relates to my direct
work.

I can follow the argument of a skewed market as a result of subsidized
lending, and was wondering whether your teacher’s work had any
discussion of microlending in markets where there is no official lender,
or at best the official lender is over-cautious? Unfortunately in many
of the places where I work, all talk of market equilibrium is a little
forced, since there often is no finance to be had, even if you will
accept the risk of physical violence. In those cases, it seems to me
that the existence of a microlender, subsidized or not, might be one of
the catalysts that is needed to force the official lender to take the
local market into consideration.

I don’t pretend to be an economist, or to fully understand the
intricacies of subsidies, and in fact, i can’t even quote statistics
about how many microlenders, and under what circumstances, actually
become self-sustainable. I do know however that there are large areas
where the market simply fails to provide even the most basic
necessities, and to take a pure free-market perspective in those areas
is naive at best, and pretty dangerous at worst. The macro-economic
reasons for the failure of local markets are probably clearly
understandably, and could be understood in terms of finite cash-flow
being focused on those organisations that have the greatest chance of
success and growth rates. But in those cases, perhaps spreading the cash
to other parts of a country is not such a bad idea?

In any case, I am always interested in other perspectives on these
issues. thanks.

By: WorldChanging: Another World Is Here

WorldChanging: Another World Is Here — Thu, 01 Jan 1970 00:00:00 +0000

Open Source Microcredit?

Microcredit — the practice of lending poor people small amounts in order to start cottage industries and small businesses — is a model that, generally…

By: Smart Mobs

Smart Mobs — Thu, 01 Jan 1970 00:00:00 +0000

Open Source MicroCredit Applications

An initiative to develop an Open Source Microcredit Suite of Applications has been launched, it seeks to address problems inherent in presently used packages. Thomas Krag of multiplicity states: “…[K]eeping tabs on thousands of tiny loans is a daunti…