I ran across an interesting piece in the NY Times that was a conversation with Muhammad Yunus, who is best known to the world for his pioneering work in microfinance. He has also advocated the spreading of microfinance. Microfinance providers currently reach 200 million clients globally. Yunus, the founder of Grameen Bank which started in Bangladesh, received the Nobel Peace Prize in 2006 along with the Grameen Bank. Yunus has received numerous awards including most recently the Congressional Gold Medal. Yunus was also selected in 2008 for the FP Top 100 Global Thinkers list, receiving recognition as the second most important public intellectual alive. According to the New York Times piece Grameen bank currently has 8.6 million borrowers, 96% of which are women. The government of Bangladesh in the last 2 years has been attacking the work of Yunus according to Yunus and the New York Times. Yunus thinks that the government of Bangladesh is trying to takeover the Grameen Bank. Here, NY Times, a blog in the New York Times defends the work of Yunus.
One of the themes that we have been discussing in class is the role of central banks in deciding to reduce unemployment or inflation. When combatting unemployment central banks lower interest rates which gives incentives to people to borrow more money and stimulate the economy. Microfinance provides financial services, including microcredit, to the world poorest people who wouldn’t otherwise receive such services if left up to normal banking institutions in the hopes that it will lower unemployment, raise the standard of living, and as an added benefit stimulate the economy. Also instead of governments using welfare and foreign aid to address the issue of poverty, microcredit lets poor individuals have borrowing capabilities from banking institutions.
In the interview Yunus describes what he calls social business, he says “I dismiss personal profit, and focus exclusively on people and planet.” “That’s what I call social business: a nondividend company dedicated to solving human problems.” He goes on in the New York Times conversation to say, “I’m not saying to get away from profit-making businesses.” “I’m saying keep these separate, run them in parallel.” Yunus is an idealist that imagines making the impossible become possible. Yunus says in the NY Times conversation that in five years he would like to see social business make up at least 1% of the world economy.
In the interview Yunus describes what he calls social business, he says “I dismiss personal profit, and focus exclusively on people and planet.” “That’s what I call social business: a nondividend company dedicated to solving human problems.” He goes on in the New York Times conversation to say, “I’m not saying to get away from profit-making businesses.” “I’m saying keep these separate, run them in parallel.” Yunus is an idealist that imagines making the impossible become possible. Yunus says in the NY Times conversation that in five years he would like to see social business make up at least 1% of the world economy.
An article in the Economist discusses the current revival of the micro finance industry and the reckless lending to the poor that led to its initial downfall. Regulators are playing more of a key role. “Microlenders’ annual interest rates are now capped at 10-12 percentage points above their own borrowing costs, leaving most charging 23-27%.” “Some charged 40% during the boom; dodgy local loan-sharks, the only alternative source of credit in many rural areas, have even higher rates.” Also the article says that microlenders such as the Grameen Brank are beginning to attract capital again. I think that microfinance is a good idea and I would like to see it continue to grow. Either way Muhammad Yunus is fascinating person that has a vision for addressing poverty.
I agree that micro-financing is a beneficial tool for the poor who are unable to get commercial bank loans. Banjeree and Duflo's "Poor Economics" talks a lot about micro-financing, and one point they make is micro-financing is less successful than proponents make it out to be. For example, after a year of someone borrowing from a MFI, their business has grown but not substantially enough to completely lift them out of poverty and its viscous circle. What the poor really need is a larger flow of money coming from commercial bank loans, but banks are often unwilling to lend to poor people. They are a high risk and they have no collateral. Additionally, banks do not know if their borrowers are credible, because they lack credit. Interest rates will remain high, which will continue to block any potential loans. So although micro-financing doesn't completely lift people out of poverty in the way it is portrayed, I think it is still a great thing that has happened in the past few decades. It does make a difference, however small.
ReplyDeleteI think that micro-financing is an excellent idea. However, I think that in order for micro-financing to work, the person receiving the aid should also receive some sort of guidance on how to use it. Recipients of micro-financing are likely aspiring to start a business with the loan, and need advice on how to do so. One of the biggest problems I saw during my time in Accra, Ghana was people with businesses too far away from the center of the town where people do their shopping. Perhaps if a group of people were to all receive micro-financing, they could come together and open a small shopping center so as to attract more customers.
ReplyDeleteI listened to an NPR debate about microfinance for one of my PoliSci classes last summer between Yunus and a microfinance banker. Yunus argues that it is morally wrong to profit from the poor while the banker argues that profit-driven incentives will help provide them more efficiently and in greater amounts. I'll post the link to the debate at the end, I think it starts about halfway through the cast. The conclusion of the debate anyway had the hosts leaning towards the banker's perspective. Although noble, Yunus' call for altruism seems a touch unrealistic on a large scale. My Economic Development class last semester did a side by side comparison of NGO microloans versus private ones and found that in addition to greater levels of loans being given, the private loaners also on average had lower interest rates due to the competitive nature of the private sector. I truly believe in altruism and the good intentions of many people, but when it comes to policy and action I tend to favor a more "cold-hearted" approach that assumes a more incentive based form of enactment.
ReplyDeleteHere's that cast!
http://www.npr.org/blogs/money/2010/09/28/130194702/the-tuesday-podcast-what-s-better-for-helping-poor-people----greed-or-charity
Thanks for the comments everyone. I enjoyed watching the debate Garrett and it does offer varying perspectives on microfinance.
ReplyDeleteI think micro-finance is a great idea and is potentially very useful for encouraging development. However, lending is not the only financial problem the poor face. The poor are often unable to save in formal institutions. Deposits made by poor individuals are often so small that banks will not accept them. Therefore, the poor have to find other ways to save. Although there are benefits of micro-finance, I believe that the poor need both an opportunity to borrow and an opportunity to save.
ReplyDeleteMicrofinancing receives too much hype and it rarely accomplished what it sets out to accomplish. The goal being that it will help poor people gain access to money in order to start a business or expand their inventory, but in reality these are very small businesses often employing one to ten people who are uninterested in hiring others. Job creation is one of the best ways a country can make a dent in its poverty rate and most people are not entrepreneurs they make a living by working for someone else. One article writes that "Just fourteen per cent of Americans, for instance, are running (or trying to run) their own business. That percentage is much higher in developing countries—in Peru, it’s almost forty per cent. That’s not because Peruvians are more entrepreneurial. It’s because they don’t have other options"
ReplyDeleteI think that micro finance is a great idea, giving opportunities to people who would otherwise not be able to. It is hard to look at the overall impact of micro finance but I found a great article that states a great way to measure it is to look at the individual impacts.
ReplyDeletehttp://www.huffingtonpost.com/elisabeth-rhyne/the-impact-of-microfinanc_b_619282.html
I completely disagree with Kimberly, for countries such as Bangladesh these small loans are the best possible way to stimulate the small economy that they do have. Even if they do only create a small business and hire 10 people that is still a new business created and 10 more people with jobs that had previously been unemployed. The point of micro loans is "micro" they are not large loans intended to be paid back over a long period on a significant business venture, but more in order to help promote small economic growth in the communities who need it the most. Micro loans are almost always paid back as well, Muhammed Yunus said that virtually every women that he gave these micro loans paid them back in full and on time. These loans are very manageable and help these countries develop slowly and without the threat of defaulting.
ReplyDeleteMicrofinance is increasingly becoming more popular and a common remedy for development in poor regions. There was another story of a women who graduated from Uuniveristy of British Columbia who started a microfinance bank in Tajikistan. Here is an interview with her and the reporter about her experience/project.
ReplyDeletehttp://blogs.vancouversun.com/2013/05/03/international-micro-finance-expert-helps-ultra-poor-in-tajikistan/