microfinance

I got my visa for India today. I've never had to get a visa before, because the longest I've stayed in any foreign country other than Mexico is 2 weeks, which is generally a short enough stay as to not require one. This is one of those times that living in San Francisco is nice, because I can just take the bus to the Indian Consulate and stand in line for a while, instead of having to mail off my passport and wait two weeks to get it back.

So, the research we're doing in India is on microfinance, which is essentially small-scale banking services for very poor people. It refers primarily to very small loans to very poor people, also known as microcredit. Microfinance is very "in" right now in the world of development, partly because there's a ton of (mostly anecdotal, but also some empirical) evidence that it helps alleviate poverty, and partly because it is appealing across more or less the entire political spectrum, which is unusual for an economic policy.

I think microfinance is pretty interesting, so I'll talk about it a little. First of all, it's important to know that for a variety of reasons, lots of poor people in developing countries work in the informal sector, which means that they don't have "official" wage-paying work. In many cases they are self-employed in very small-scale businesses; imagine something like weaving baskets and then selling them. The idea is that they can be more profitable in these kinds of activities if they have access to credit, which might allow them to buy more raw materials at one time, or to buy some kind of productive asset like a sewing machine. Essentially, they're the same kinds of reasons why a business in this country would take out a loan. The difference is that since these people are so poor and have such small-scale businesses, they might only need to borrow $200 or $100 or $50.

Regular banks, as you can imagine, don't tend to lend such tiny amounts, because the overhead on a small loan is nearly as much as that of a big loan, but the interest collected is a lot less, so it isn't profitable. Furthermore, it's not like they have FICO scores in, say, rural Bangladesh (which, incidentally, is where microfinance was started), so banks don't know anything about the creditworthiness of poor people with no ties to the formal economy. Most of these people can't offer anything of value as collateral, because in many cases they literally don't have anything of value. As a result of these problems, the poor tend not to have access to credit. If they do, it's often from informal money lenders that charge very high interest rates (and I mean VERY high, like 20% a MONTH).

So microfinance institutions (MFIs), most of which are nonprofit, have been created to provide small quantities of credit to the poor in developing countries (and, in some cases, developed countries as well...there are some MFIs that operate in the US, I think). Most MFIs use a group loan mechanism, where people who want loans organize themselves into groups of, say, five people, and some or all of the five get an individual loan. Everyone in the group essentially cosigns for everyone else's loan, so that if one person doesn't repay the loan, that person's group members are responsible for paying. MFIs tend to have excellent repayment rates (around 95%).

You can probably see why microfinance is so politically popular. Conservatives (and economists) like it because it uses market mechanisms and encourages self-sufficiency. Lefties like it because it's all about individual self-determination and empowerment, especially for women, who are very often targeted by MFIs as clients.

So that's the basic gist of microfinance. I'll get into the specifics of what we're researching later.

p.s. I have this small red beanbag-esque pillow that my dear friend B gave me, and I've been wearing it on my head for most of the time I've been typing this (don't ask me why...I really don't know). I can see myself in the mirror on my closet door, and I look just like one of those mushrooms from Super Mario Brothers.