How microfinance companies take advantage of the poor
May 16, 2013 4:32 PM Subscribe
What's the point of teaching a man to fish, if someone else owns the river? Berkeley professor Ananya Roy narrates a hand-drawn video about who is profiting from poverty.
Yeah, any Pay Day loan or check cashing service. It costs so much money to be poor.
posted by The Whelk at 4:50 PM on May 16, 2013 [1 favorite]
posted by The Whelk at 4:50 PM on May 16, 2013 [1 favorite]
The Wig punched himself through a couple of African backwaters and felt like a shark cruising a swimming pool thick with caviar. Not that any one of those tasty tiny eggs arnounted to much, but you could just open wide and scoop, and it was easy and filling and it added up. The Wig worked the Africans for a week, incidentally bringing about the collapse of at least three governments and causing untold human suffering. At the end of his week, fat with the crearn of several million laughably tiny bank accounts, he retired. As he was going out, the locusts were coming in; other people had gotten the African idea.
--William Gibson, Count Zero
posted by poe at 4:55 PM on May 16, 2013 [7 favorites]
--William Gibson, Count Zero
posted by poe at 4:55 PM on May 16, 2013 [7 favorites]
An alternative strategy to microfinance is savings groups. Women meet regularly to put away small amounts of money (less than a dollar) into a communal pot. When they need it -- during a food shortage, or if they wish to expand their farm, for example -- they can apply to the group for a loan.
Oxfam has been investigating the strategy in Mali and it is showing some pleasing results.
posted by dontjumplarry at 5:06 PM on May 16, 2013 [6 favorites]
Oxfam has been investigating the strategy in Mali and it is showing some pleasing results.
posted by dontjumplarry at 5:06 PM on May 16, 2013 [6 favorites]
Geez, I never even considered that as a possibility.
Profiting from desperation is easy, and poverty is nothing if not a long, slow, all-pervading state of desperation.
posted by mhoye at 5:07 PM on May 16, 2013 [2 favorites]
Profiting from desperation is easy, and poverty is nothing if not a long, slow, all-pervading state of desperation.
posted by mhoye at 5:07 PM on May 16, 2013 [2 favorites]
Yeah I'm tired of people being jaded about poverty. We have mass production and technology that could eliminate poverty if those with power and money decided to use intelligence and innovation toward that goal.
Thanks for posting this. These things CAN change. We have poverty because we have a meritocracy in which we believe people with less skills deserve poverty.
It's planned and deliberate.
posted by xarnop at 5:11 PM on May 16, 2013 [7 favorites]
Thanks for posting this. These things CAN change. We have poverty because we have a meritocracy in which we believe people with less skills deserve poverty.
It's planned and deliberate.
posted by xarnop at 5:11 PM on May 16, 2013 [7 favorites]
Where "less skills" equals anyone whose skills are common to most people and thus unimpressive and unworthy of being well paid for. This is bullshit because many of these are necessary needed services that improve human welfare and are extremely hard on the body and psyche to perform. People do not deserve the wages we pay them to do these services.
posted by xarnop at 5:16 PM on May 16, 2013 [11 favorites]
posted by xarnop at 5:16 PM on May 16, 2013 [11 favorites]
Ugh. Being poor sucks. Even dealing with entities that have no hope of being "profitable."
I can get an all day bus pass for $4.50, seven days is $16, a whole month of unlimited rides is $58.
But I have to have $58 all in one place on a given day to go get that pass. I usually just...don't. But on days that I do, it's terrifying to choose the bus pass because what if something happens?
On preview:
in which we believe people with less skills deserve poverty.
We call it a "meritocracy" and we call the assets "skills" but....ability is not the thing being privileged in a lot of situations. Mental illness, skin color, gender, which neighborhood you're from. These all play a huge role in whether you get a job, how much you get paid when you start (thus determining your raise trajectory), whether you get promoted, and whether you get canned when it's layoff time. Whether you suffer so many tiny instances of institutionalized bullshit that you leave a company before you get promoted. Then there's the shitty situation I'm in where I haven't finished university by one class and that piece of paper makes me simultaneously over and under qualified for everything.
That and my problems with "attention to detail."
posted by bilabial at 5:18 PM on May 16, 2013 [9 favorites]
I can get an all day bus pass for $4.50, seven days is $16, a whole month of unlimited rides is $58.
But I have to have $58 all in one place on a given day to go get that pass. I usually just...don't. But on days that I do, it's terrifying to choose the bus pass because what if something happens?
On preview:
in which we believe people with less skills deserve poverty.
We call it a "meritocracy" and we call the assets "skills" but....ability is not the thing being privileged in a lot of situations. Mental illness, skin color, gender, which neighborhood you're from. These all play a huge role in whether you get a job, how much you get paid when you start (thus determining your raise trajectory), whether you get promoted, and whether you get canned when it's layoff time. Whether you suffer so many tiny instances of institutionalized bullshit that you leave a company before you get promoted. Then there's the shitty situation I'm in where I haven't finished university by one class and that piece of paper makes me simultaneously over and under qualified for everything.
That and my problems with "attention to detail."
posted by bilabial at 5:18 PM on May 16, 2013 [9 favorites]
Yes, there is a giant mechanism designed to profit off other people's poverty, and, as bilabial points out, there is also a major structural benefit to having enough cash to buy stuff in bulk.
That said, I had a sort of "where's the beef" feeling about this twelve-minute video. What exactly IS a "princely monopoly"? How does our current system of profiting off poverty match up with past systems (i.e. serfdom and slavery)? What are the alternatives? When the loan-sharky microfinance company says they charge giant interest rates because it makes the project "scale," i.e. plenty of investors are willing to get into microfinance when the profit rate is high enough, what response do the pro-poor activists have to that? Is there a different way we could get investors to work with less predatory microfinance? And what does she mean when she says Bangladesh's BRAC "transforms the economies of the poor"?
posted by feets at 5:29 PM on May 16, 2013 [4 favorites]
That said, I had a sort of "where's the beef" feeling about this twelve-minute video. What exactly IS a "princely monopoly"? How does our current system of profiting off poverty match up with past systems (i.e. serfdom and slavery)? What are the alternatives? When the loan-sharky microfinance company says they charge giant interest rates because it makes the project "scale," i.e. plenty of investors are willing to get into microfinance when the profit rate is high enough, what response do the pro-poor activists have to that? Is there a different way we could get investors to work with less predatory microfinance? And what does she mean when she says Bangladesh's BRAC "transforms the economies of the poor"?
posted by feets at 5:29 PM on May 16, 2013 [4 favorites]
So I see this, and I think it's great, and I have an education in international studies and economics (sigh) and a career in unrelated mumbo-jumbo, and it makes me wonder what can I--the common person, who's somewhat but not very deeply knowledgeable about these issues and would like to see poverty eradicated or mitigated or whatever's feasible--what can I do?
posted by psoas at 5:29 PM on May 16, 2013 [5 favorites]
posted by psoas at 5:29 PM on May 16, 2013 [5 favorites]
Well action steps I can see, I thought it was awesome when a gas station advertised their minimum wage was 12 per hour. If the gov won't enforce a living wage, we could boycott businesses who pay under living wages and try to support businesses who pay a living wage to all employees. It's hard to find things you can do when you don't have money or power, but what the people do have is numbers- collaborative efforts would likely make a dent if there was more strategy and effort (and if somehow people with power and money and who run business decided ethics and human welfare needed to be a foundation of their business model even if it means less profit)
posted by xarnop at 5:38 PM on May 16, 2013 [3 favorites]
posted by xarnop at 5:38 PM on May 16, 2013 [3 favorites]
We have mass production and technology that could eliminate poverty if those with power and money decided to use intelligence and innovation toward that goal.
You should really take a minute to look behind that curtain sometime.
posted by mhoye at 5:39 PM on May 16, 2013 [1 favorite]
You should really take a minute to look behind that curtain sometime.
posted by mhoye at 5:39 PM on May 16, 2013 [1 favorite]
Yeah I think most american companies can afford to pay their people living wage if they chose to make it a priority. Do you think not? It would cost profits, but with the kind of profits a lot of companies are dealing with, and the kind of pay the people at the top are getting, I think some changes could be made if people valued their lower rung employees.
Plenty of companies have huge profit margins and still pay their employees close to minimum wage and have no insurance. Yes I think this is deliberately designed based on the assumption that "Grunt labor" is worthless and the people who do it deserve poverty unless they can get a degree or somehow climb the lader (the ladder by default will not include everyone so it's designed to leave some people at the bottom)
posted by xarnop at 5:55 PM on May 16, 2013 [3 favorites]
Plenty of companies have huge profit margins and still pay their employees close to minimum wage and have no insurance. Yes I think this is deliberately designed based on the assumption that "Grunt labor" is worthless and the people who do it deserve poverty unless they can get a degree or somehow climb the lader (the ladder by default will not include everyone so it's designed to leave some people at the bottom)
posted by xarnop at 5:55 PM on May 16, 2013 [3 favorites]
feets, agreed that the critique is stronger than the next steps. But given that the microfinance fad (see the introduction to Joel Best's book on fads, Flavor of the Month for how eager we are to find to panacea to fix all things forever more) is billed as poverty alleviation, we should not be too shy to cry b.s. when it turns out it is better at wealth transfer from the poor.
posted by spamandkimchi at 5:56 PM on May 16, 2013 [2 favorites]
posted by spamandkimchi at 5:56 PM on May 16, 2013 [2 favorites]
This too shall fail.
There has only been one historically reliable way to redistribute the wealth of a society. Revolution.
I don't get me wrong I in no shape or form expect such a thing. The ruling class has us locked down tight.
posted by Bonzai at 6:10 PM on May 16, 2013 [2 favorites]
There has only been one historically reliable way to redistribute the wealth of a society. Revolution.
I don't get me wrong I in no shape or form expect such a thing. The ruling class has us locked down tight.
posted by Bonzai at 6:10 PM on May 16, 2013 [2 favorites]
The problem is global capitalism; if you're not willing to confront that, you're not hitting the crux of the problem.
posted by thsmchnekllsfascists at 6:12 PM on May 16, 2013 [3 favorites]
posted by thsmchnekllsfascists at 6:12 PM on May 16, 2013 [3 favorites]
There has only been one historically reliable way to redistribute the wealth of a society. Revolution.
Total bullshit, and an excuse for middle class armchair socialists to ignore the grossly inequitable share of global wealth they themselves own.
As as Mefite living in an OECD country, you're almost certainly in the top 10% of global incomes and quite likely in the top 5%.
If we want to do something, we can start by redistributing some of our own wealth (say 10%) by supporting interventions that have been proven to be highly effective at reducing poverty, saving lives and decreasing inequality (including through randomized, controlled trials).
For example. More examples.
posted by dontjumplarry at 6:28 PM on May 16, 2013 [13 favorites]
Total bullshit, and an excuse for middle class armchair socialists to ignore the grossly inequitable share of global wealth they themselves own.
As as Mefite living in an OECD country, you're almost certainly in the top 10% of global incomes and quite likely in the top 5%.
If we want to do something, we can start by redistributing some of our own wealth (say 10%) by supporting interventions that have been proven to be highly effective at reducing poverty, saving lives and decreasing inequality (including through randomized, controlled trials).
For example. More examples.
posted by dontjumplarry at 6:28 PM on May 16, 2013 [13 favorites]
Revolution? Ha, the rate of successful revolutions are pretty low, and even when one particular bad state is overthrown they are as likely as not replaced with something as bad if not worse.
posted by edgeways at 6:28 PM on May 16, 2013 [6 favorites]
posted by edgeways at 6:28 PM on May 16, 2013 [6 favorites]
it makes me wonder what can I--the common person, who's somewhat but not very deeply knowledgeable about these issues and would like to see poverty eradicated or mitigated or whatever's feasible--what can I do?
As noted above, by supporting charities whose impacts on alleviating poverty have been proven by rigorous methodologies. Life You Can Save and Giving What We Can have some suggestions as noted above. Another place with great suggestions is Innovations for Poverty Action, a great organisation which specialises in randomized controlled trials of poverty interventions.
posted by dontjumplarry at 6:34 PM on May 16, 2013 [1 favorite]
As noted above, by supporting charities whose impacts on alleviating poverty have been proven by rigorous methodologies. Life You Can Save and Giving What We Can have some suggestions as noted above. Another place with great suggestions is Innovations for Poverty Action, a great organisation which specialises in randomized controlled trials of poverty interventions.
posted by dontjumplarry at 6:34 PM on May 16, 2013 [1 favorite]
Where "less skills" equals anyone whose skills are common to most people and thus unimpressive and unworthy of being well paid for. This is bullshit because many of these are necessary needed services that improve human welfare and are extremely hard on the body and psyche to perform. People do not deserve the wages we pay them to do these services.
Wages, to an extent (which is to say, when you ignore the institutional bullshit that bilabial references), follow basic economic principles. Cost is a function of supply (scarcity) and demand (employer need). To address your particular beef would require nothing short of a paradigm shift in how we evaluate economic value.
posted by bfranklin at 6:39 PM on May 16, 2013
Wages, to an extent (which is to say, when you ignore the institutional bullshit that bilabial references), follow basic economic principles. Cost is a function of supply (scarcity) and demand (employer need). To address your particular beef would require nothing short of a paradigm shift in how we evaluate economic value.
posted by bfranklin at 6:39 PM on May 16, 2013
bilabial: "I can get an all day bus pass for $4.50, seven days is $16, a whole month of unlimited rides is $58. But I have to have $58 all in one place on a given day to go get that pass. I usually just...don't."
“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness.”
― Terry Pratchett, Terry Pratchett's Men at Arms
posted by zardoz at 6:41 PM on May 16, 2013 [17 favorites]
“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness.”
― Terry Pratchett, Terry Pratchett's Men at Arms
posted by zardoz at 6:41 PM on May 16, 2013 [17 favorites]
None of this is new, George Orwell vividly talks about his experience of the fleecing of the poor in Paris and London in 1929 here.
posted by Blasdelb at 6:48 PM on May 16, 2013 [2 favorites]
posted by Blasdelb at 6:48 PM on May 16, 2013 [2 favorites]
dontjumplarry, your point about putting your money where your values are is the crux of G.A. Cohen's If You're An Egalitarian, How Come You're So Rich?
That said, what is the best way? Is donating to organizations that do good work in teaching people how to fish, but don't address the issue of river access or the polluter upstream, really a solution? I'm all for palliatives and harm reduction, but they don't fix the fundamental inequities and power imbalances.
posted by spamandkimchi at 7:04 PM on May 16, 2013 [2 favorites]
That said, what is the best way? Is donating to organizations that do good work in teaching people how to fish, but don't address the issue of river access or the polluter upstream, really a solution? I'm all for palliatives and harm reduction, but they don't fix the fundamental inequities and power imbalances.
posted by spamandkimchi at 7:04 PM on May 16, 2013 [2 favorites]
I've been giving $25 or so per month for a little while to Kiva loan recipients. I haven't looked at the video all the way through but I can't help but think I'm doing a little good. With Kiva you essentially get no interest, exposure to non-payback, and currency fluctuation. But, the payback rate is well into the 90% range.
I understand well that with capitalism you need poverty, and in a lot of cases international aid attempts such as the green revolution hurt poor rural populations. The best case we can hope for in the poorest places are time-consuming subsistence jobs. But, I think we can also hope for healthy environments, good health care, peace, social and religious freedoms, and the like. It's a fine balance, however, when you ask people to remain in poverty and not have leisure time and to not want more.
posted by jimmythefish at 7:05 PM on May 16, 2013
I understand well that with capitalism you need poverty, and in a lot of cases international aid attempts such as the green revolution hurt poor rural populations. The best case we can hope for in the poorest places are time-consuming subsistence jobs. But, I think we can also hope for healthy environments, good health care, peace, social and religious freedoms, and the like. It's a fine balance, however, when you ask people to remain in poverty and not have leisure time and to not want more.
posted by jimmythefish at 7:05 PM on May 16, 2013
Total bullshit, and an excuse for middle class armchair socialists to ignore the grossly inequitable share of global wealth they themselves own.
I'm working poor not middle class. I used to be middle class but not no more.
You don't know me so don't make assumptions. You think a guy making minimum wage is in the same boat as you because he's way richer than a Bangladesh slum orphan? You honestly see no difference in the lives of people who can get wiped out when their car breaks down versus a guy whose biggest problem is that he has to drive 15 extra minutes to get to a Whole Foods?
I should donate 10 percent? Are you fucking seriously suggesting that?
posted by Bonzai at 7:11 PM on May 16, 2013 [14 favorites]
I'm working poor not middle class. I used to be middle class but not no more.
You don't know me so don't make assumptions. You think a guy making minimum wage is in the same boat as you because he's way richer than a Bangladesh slum orphan? You honestly see no difference in the lives of people who can get wiped out when their car breaks down versus a guy whose biggest problem is that he has to drive 15 extra minutes to get to a Whole Foods?
I should donate 10 percent? Are you fucking seriously suggesting that?
posted by Bonzai at 7:11 PM on May 16, 2013 [14 favorites]
I can get an all day bus pass for $4.50, seven days is $16, a whole month of unlimited rides is $58.
But I have to have $58 all in one place on a given day to go get that pass. I usually just...don't. But on days that I do, it's terrifying to choose the bus pass because what if something happens?
You should buy $16 passes assuming you usually ride 5 or more days per week. It's the best risk/return choice. You don't lose nearly so much buying weekly instead of monthly as you buying daily instead of weekly.
If you're buying day passes at all right now, switching to weekly and pocketing the savings will get you to where you have the margin for the monthly every month, further increasing your savings.
posted by michaelh at 7:34 PM on May 16, 2013 [1 favorite]
But I have to have $58 all in one place on a given day to go get that pass. I usually just...don't. But on days that I do, it's terrifying to choose the bus pass because what if something happens?
You should buy $16 passes assuming you usually ride 5 or more days per week. It's the best risk/return choice. You don't lose nearly so much buying weekly instead of monthly as you buying daily instead of weekly.
If you're buying day passes at all right now, switching to weekly and pocketing the savings will get you to where you have the margin for the monthly every month, further increasing your savings.
posted by michaelh at 7:34 PM on May 16, 2013 [1 favorite]
@feets - I too wanted to know more about what sets BRAC apart from other NGOs. Spending an extra two minutes on that would have been a far better use of time than the kind of bizarre "yellow capitalism" thing at the end, which was mostly romanticizing a cargo cultist.
posted by Candleman at 8:03 PM on May 16, 2013 [1 favorite]
posted by Candleman at 8:03 PM on May 16, 2013 [1 favorite]
I am totally on these people's sides and I still found that video tedious & unwatchable. Too bad. Someone needs to make one with better graphics and less ponderous music.
posted by small_ruminant at 8:17 PM on May 16, 2013 [2 favorites]
posted by small_ruminant at 8:17 PM on May 16, 2013 [2 favorites]
I was disappointed in the infographics department -- there were some really bright ideas (I loved the "dollars" as flipbooks, and things like flipping the pyramid around until the asterisk appeared), but overall I did not find that the graphics did much more than illustrate -- that is they failed to elucidate, to summarize, to make a point visceral. Such a mixed bag.
I'm OK with Roy being a polemicist, but I wasn't convinced when she turned to BRAC and basically said "BRAC has a really good answer, I will now tell you all the good points about BRAC" without really critiquing it or using it as an example that could be part of the answer.
posted by dhartung at 11:45 PM on May 16, 2013 [1 favorite]
I'm OK with Roy being a polemicist, but I wasn't convinced when she turned to BRAC and basically said "BRAC has a really good answer, I will now tell you all the good points about BRAC" without really critiquing it or using it as an example that could be part of the answer.
posted by dhartung at 11:45 PM on May 16, 2013 [1 favorite]
Payday loans are not even slightly the same as microfinance. Anyone who thinks that a system which could generate profit is inherently the enemy of social improvement is an armchair socialist who has no intention of making positive change.
posted by ThatFuzzyBastard at 1:33 AM on May 17, 2013 [2 favorites]
posted by ThatFuzzyBastard at 1:33 AM on May 17, 2013 [2 favorites]
What the hell, I'll even expand a little. Microfinancing is precisely the opposite of the payday loan industry. It was premised on the idea that a huge obstacle facing poor people, and particularly poor entrepeneurs, is their lack of access to loans at reasonable rates. So microfinance organizations offer loans of very small amounts of money at very low rates, to enable small businesses.
The fact is, it's very hard for poor people to get loans because (duh) poor people are a bad credit risk. To use the example from the video, auto loans for the poor are not high because capitalist meanies are mean, they're high because making auto loans to poor people is a good way to lose your money, so the payoff has to be very high to make anyone willing to do it.
The alternative, for years, was simple donation. But donations of money to the poor have a terrible record of actually improving anyone's state. The money tends to vanish into the administration of the organization doing the donating, and when it does make its way to those it need, in gets (understandably) spent on immediate necessities, and that delays crisis rather than preventing it (anyone who starts chirping "We could eliminate poverty is we were just more generous!" is invited to try it. Start with the poorest person you personally know, and report back on how it works out).
So microfinance companies were created on the principe of small amounts, and low interest rates, with the donors getting just enough profit that the money can be rustled up without depending on the kindness of strangers, and so a board of directors will have an incentive to keep an eye on how the cash is getting distributed. It's been the biggest success story in anti-poverty efforts, as well as gender equality.
This professor seems to hate microfinance because it involves someone profiting. And that, to me, is the difference between someone who wants to improve the lives of the poor, and someone who wants to show off their moral credentials. Microfinance makes donors feel less virtuous, but it has a better track record of improving poor people's lives. Up to you which you regard as more important.
posted by ThatFuzzyBastard at 2:02 AM on May 17, 2013 [5 favorites]
The fact is, it's very hard for poor people to get loans because (duh) poor people are a bad credit risk. To use the example from the video, auto loans for the poor are not high because capitalist meanies are mean, they're high because making auto loans to poor people is a good way to lose your money, so the payoff has to be very high to make anyone willing to do it.
The alternative, for years, was simple donation. But donations of money to the poor have a terrible record of actually improving anyone's state. The money tends to vanish into the administration of the organization doing the donating, and when it does make its way to those it need, in gets (understandably) spent on immediate necessities, and that delays crisis rather than preventing it (anyone who starts chirping "We could eliminate poverty is we were just more generous!" is invited to try it. Start with the poorest person you personally know, and report back on how it works out).
So microfinance companies were created on the principe of small amounts, and low interest rates, with the donors getting just enough profit that the money can be rustled up without depending on the kindness of strangers, and so a board of directors will have an incentive to keep an eye on how the cash is getting distributed. It's been the biggest success story in anti-poverty efforts, as well as gender equality.
This professor seems to hate microfinance because it involves someone profiting. And that, to me, is the difference between someone who wants to improve the lives of the poor, and someone who wants to show off their moral credentials. Microfinance makes donors feel less virtuous, but it has a better track record of improving poor people's lives. Up to you which you regard as more important.
posted by ThatFuzzyBastard at 2:02 AM on May 17, 2013 [5 favorites]
This thread needs a soundtrack, take it away Mr. TV Smith
posted by jeffen at 4:51 AM on May 17, 2013 [1 favorite]
posted by jeffen at 4:51 AM on May 17, 2013 [1 favorite]
ThatFuzzyBastard: Microfinancing is precisely the opposite of the payday loan industry. It was premised on the idea that a huge obstacle facing poor people, and particularly poor entrepeneurs, is their lack of access to loans at reasonable rates. So microfinance organizations offer loans of very small amounts of money at very low rates, to enable small businesses.
That was the initial idea behind microfinancing - but from the research I'd read it has not turned out quite as well as expected. Due to a variety of factors the interest rates that official microlenders offer are only slightly lower than what borrowers can get from the local loan shark. And the microlender loans are more rigid, more "instituational" and in practice for individuals may not be that much better. They are also loans of very small amounts and generally only made to fund low risk activities that do not in the end improve the situation of the borrowers.
The loan sharks are embedded in the community and so don't have somoe of the overhead costs of enforcement and paperwork that official microlenders do. Its just not that clear cut that the Microlenders are "helping" but some of them are making good profits.
posted by mary8nne at 5:25 AM on May 17, 2013 [1 favorite]
That was the initial idea behind microfinancing - but from the research I'd read it has not turned out quite as well as expected. Due to a variety of factors the interest rates that official microlenders offer are only slightly lower than what borrowers can get from the local loan shark. And the microlender loans are more rigid, more "instituational" and in practice for individuals may not be that much better. They are also loans of very small amounts and generally only made to fund low risk activities that do not in the end improve the situation of the borrowers.
The loan sharks are embedded in the community and so don't have somoe of the overhead costs of enforcement and paperwork that official microlenders do. Its just not that clear cut that the Microlenders are "helping" but some of them are making good profits.
posted by mary8nne at 5:25 AM on May 17, 2013 [1 favorite]
As to the specific issue at hand. Making a profit is fine. A 30% profit margin, however, seems
excessive.
If donors to microfinance were to insist on profit margin transparency things would improve.
This holds true for all charities.
posted by Bonzai at 5:35 AM on May 17, 2013
excessive.
If donors to microfinance were to insist on profit margin transparency things would improve.
This holds true for all charities.
posted by Bonzai at 5:35 AM on May 17, 2013
"Yeah I think most american companies can afford to pay their people living wage if they chose to make it a priority."
They Shure could in good 'ole England.
I was expexcting something more hardcore, an examination of the areas where poor people pay more other than the obvious pay-day-loans stuff.
For e.g. my mate has an internet account where they send him a bill and he pays it and it costs more for him than for me paying by direct debit. He is unemployed and if the bill comes at the wrong time he is charged ten pounds for being a day late. He also has some weird building society account, and he had say £7.50 in there. So he was a couple of days from receiving his social security and had no money and went to take out a fiver and was told the minimum withdrawal was ten pounds, so had no money or food for two whole days. (He told me after the event, or I would have lent him a tenner, in case you're wondering - but to ask someone for money, even just a two day loan, is humiliating at best.).
I am poor myself and have card and key meters for gas and electric. These are in the poorest households and charge the highest rates for gas and electric plus a huge meter rental for the gas meter.
So there are lots of things that could have been covered in the video, plus the economics of how this stuff works economically/financially and how politics is linked to it, and so on.
posted by marienbad at 5:58 AM on May 17, 2013 [2 favorites]
They Shure could in good 'ole England.
I was expexcting something more hardcore, an examination of the areas where poor people pay more other than the obvious pay-day-loans stuff.
For e.g. my mate has an internet account where they send him a bill and he pays it and it costs more for him than for me paying by direct debit. He is unemployed and if the bill comes at the wrong time he is charged ten pounds for being a day late. He also has some weird building society account, and he had say £7.50 in there. So he was a couple of days from receiving his social security and had no money and went to take out a fiver and was told the minimum withdrawal was ten pounds, so had no money or food for two whole days. (He told me after the event, or I would have lent him a tenner, in case you're wondering - but to ask someone for money, even just a two day loan, is humiliating at best.).
I am poor myself and have card and key meters for gas and electric. These are in the poorest households and charge the highest rates for gas and electric plus a huge meter rental for the gas meter.
So there are lots of things that could have been covered in the video, plus the economics of how this stuff works economically/financially and how politics is linked to it, and so on.
posted by marienbad at 5:58 AM on May 17, 2013 [2 favorites]
mary8nne, that's a really good point. Critiquing how particular microfinance groups is important, but getting mad at them for profiting is silly, like here. It doesn't matter how high the profit margin is, it only matters how significant the change in the recipients life is.
posted by ThatFuzzyBastard at 8:07 AM on May 17, 2013
posted by ThatFuzzyBastard at 8:07 AM on May 17, 2013
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
Hellooooo, Wal-Mart!
posted by Gelatin at 9:27 AM on May 17, 2013 [1 favorite]
Hellooooo, Wal-Mart!
posted by Gelatin at 9:27 AM on May 17, 2013 [1 favorite]
Microfinance is what I used to do, and for what it's worth, there has been a significant amount of soul-searching and critique from within the non-profit community that energized "the microfinance revolution" about Compartamos and similar institutions.
In principle, the idea of charging high interest rates on microloans to cover costs is not necessarily fundamentally flawed (if one accepts that working within economic structures as they currently exist is not flawed, anyway). It is far more costly to extend a large number of small, short-term (while an interest rate may be annualized at 100%, traditional microfinance loans are much shorter term, extending over weeks or months) loans to clients inexperienced with formal financial practices than it is to loan larger amounts over longer terms. Microfinance requires a larger number of loan officers than traditional finance, and those loan officers need to be able to do things like spend most of their day traveling to work with clients (where they may also be engaged in non-financial activities like literacy, numeracy, and health training delivery).
The issue of access to finance is somewhat glossed over in the video, I think. The target clients for microfinance are people who can't get to the bank, or wouldn't be seriously considered by a bank, and basically have moneylenders, friends/family, and personal savings as their sources for business funding. This places substantial limits on their economic growth potential, particularly as, for the poor, unsecured savings have a way of disappearing in immediate needs, emergencies, social obligations, and sometimes outright theft.
(As an aside, this idea of access is one of the premises in the Bottom of the Pyramid approach mentioned briefly in the middle of the video -- expanding poor people's access to goods they can afford. I am always happy to see this approach critiqued, as I think it falls prey to similar drivers that turned microfinance into a highly hyped "panacea" for global poverty.)
A microfinance program that wants to reach lots of poor people also needs to grow, and that costs money. Microfinance programs run by non-profits plow additional earnings back into loan capital and operations, but the sustainability of non-profit microfinance has been a long-standing concern, particularly where programs grow large enough that they can't realistically be funded with donations. So the idea of borrowing to fund loan portfolios or seeking investment from shareholders became attractive.
As microfinance gained steam, it became a wonderfully easy sell, full of "bootstrap"-style success stories of women (and men, but very often women) who just needed a relatively small, reliable infusion of cash (at an interest rate generally lower than the local moneylender's) to turn their businesses into profitable, rather than subsistence, enterprises and turn their families' lives around. It was hugely appealing to both institutions and individuals who wanted to believe that the system could work for anyone. It also held the promise of sustainability -- a donor could "seed" a program to start and watch it grow into a self-funding institution. It not only tugged at the heartstrings, it responded to critiques of international development as a handout-oriented charity.
Rigorous impact research has been something of a hard sell in international development. NGOs often can't do it without donor funding, and donor emphasis on results hasn't always been informed by the investment required to do impact research properly. Plus, there are ethical considerations -- a popular one is "If an intervention is proving to be highly successful, is it right to withhold it from the control population?" This is beginning to change (the Bush years were something of a setback for the rigorous research advocates in USAID), but the challenges of attribution in activities like microfinance are still substantial.
I'm not up on the latest on BRAC, but I believe what Roy is talking about with their work on "transforming economies" is their value chain work, which makes a more concerted effort at addressing a range of factors that keep the poor in poverty. (For the research crowd, deriving attribution from value chain work is a particularly interesting challenge because the interventions are, ideally, highly complex and responsive to the economic environment.) I worry that value chains are acquiring some of the gloss that once stuck to microfinance, however, in that it can fall prey to the assumption that the current system can be made to work for everyone.
posted by EvaDestruction at 11:43 AM on May 17, 2013 [4 favorites]
In principle, the idea of charging high interest rates on microloans to cover costs is not necessarily fundamentally flawed (if one accepts that working within economic structures as they currently exist is not flawed, anyway). It is far more costly to extend a large number of small, short-term (while an interest rate may be annualized at 100%, traditional microfinance loans are much shorter term, extending over weeks or months) loans to clients inexperienced with formal financial practices than it is to loan larger amounts over longer terms. Microfinance requires a larger number of loan officers than traditional finance, and those loan officers need to be able to do things like spend most of their day traveling to work with clients (where they may also be engaged in non-financial activities like literacy, numeracy, and health training delivery).
The issue of access to finance is somewhat glossed over in the video, I think. The target clients for microfinance are people who can't get to the bank, or wouldn't be seriously considered by a bank, and basically have moneylenders, friends/family, and personal savings as their sources for business funding. This places substantial limits on their economic growth potential, particularly as, for the poor, unsecured savings have a way of disappearing in immediate needs, emergencies, social obligations, and sometimes outright theft.
(As an aside, this idea of access is one of the premises in the Bottom of the Pyramid approach mentioned briefly in the middle of the video -- expanding poor people's access to goods they can afford. I am always happy to see this approach critiqued, as I think it falls prey to similar drivers that turned microfinance into a highly hyped "panacea" for global poverty.)
A microfinance program that wants to reach lots of poor people also needs to grow, and that costs money. Microfinance programs run by non-profits plow additional earnings back into loan capital and operations, but the sustainability of non-profit microfinance has been a long-standing concern, particularly where programs grow large enough that they can't realistically be funded with donations. So the idea of borrowing to fund loan portfolios or seeking investment from shareholders became attractive.
As microfinance gained steam, it became a wonderfully easy sell, full of "bootstrap"-style success stories of women (and men, but very often women) who just needed a relatively small, reliable infusion of cash (at an interest rate generally lower than the local moneylender's) to turn their businesses into profitable, rather than subsistence, enterprises and turn their families' lives around. It was hugely appealing to both institutions and individuals who wanted to believe that the system could work for anyone. It also held the promise of sustainability -- a donor could "seed" a program to start and watch it grow into a self-funding institution. It not only tugged at the heartstrings, it responded to critiques of international development as a handout-oriented charity.
Rigorous impact research has been something of a hard sell in international development. NGOs often can't do it without donor funding, and donor emphasis on results hasn't always been informed by the investment required to do impact research properly. Plus, there are ethical considerations -- a popular one is "If an intervention is proving to be highly successful, is it right to withhold it from the control population?" This is beginning to change (the Bush years were something of a setback for the rigorous research advocates in USAID), but the challenges of attribution in activities like microfinance are still substantial.
I'm not up on the latest on BRAC, but I believe what Roy is talking about with their work on "transforming economies" is their value chain work, which makes a more concerted effort at addressing a range of factors that keep the poor in poverty. (For the research crowd, deriving attribution from value chain work is a particularly interesting challenge because the interventions are, ideally, highly complex and responsive to the economic environment.) I worry that value chains are acquiring some of the gloss that once stuck to microfinance, however, in that it can fall prey to the assumption that the current system can be made to work for everyone.
posted by EvaDestruction at 11:43 AM on May 17, 2013 [4 favorites]
spamandkimchi we should not be too shy to cry b.s. when it turns out [microfinance] is better at wealth transfer from the poor.
I agree that we shouldn't be starry-eyed about microfinance. It can be done in extremely predatory ways.
However, I have not seen evidence that microfinance -- a big game @ this point, not just Compartamos -- is fleecing more poor people than it actually assists. Have you?
posted by feets at 12:15 AM on May 18, 2013
I agree that we shouldn't be starry-eyed about microfinance. It can be done in extremely predatory ways.
However, I have not seen evidence that microfinance -- a big game @ this point, not just Compartamos -- is fleecing more poor people than it actually assists. Have you?
posted by feets at 12:15 AM on May 18, 2013
Fleecing (pdf) in addition to not being particularly effective (due to hidden costs) any more (pdf presentation). One of my colleagues has done work on microfinance in Bangladesh, his home country, and found, as other scholars have, that the entrepreneurial success story of taking a loan out to get the village's first mobile phone that can then be rented out to generate income only really works for the first few people who get mobile phones. Getting a loan to get the village's 15th mobile phone is not that effective re: livelihood generation.
posted by spamandkimchi at 3:40 AM on May 18, 2013
posted by spamandkimchi at 3:40 AM on May 18, 2013
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Geez, I never even considered that as a possibility.
posted by twoleftfeet at 4:44 PM on May 16, 2013