http://www.nytimes.com/2010/11/18/world/asia/18mi…
Really great article in the NYT today. I am a huge believer in microfinance and follow it closely. I hope this situation shakes out because Indian is one of the areas that I think can benefit from microfinancing the most. If lenders decide to pull out of this state in particular or the country as a whole it would be a huge lose.
The problem with micro finance is that in order for it to be feasible the interest rates have to be enormous. For example, if I want to lend 100 bucks to a guy in a tribe in the middle of nowhere it might cost me at least 10 bucks in fees just to find him and set up the infrastructure to service the loan. When you get in the risk of default and inflation you're pushing 30 bucks on 100 dollar loan. So now this poor schmuck has to turn around 30 percent!
I would love to see micro finance work, but the rates have to be reasonable or its just loan sharking even if the intentions are good.
Yeah, I think the issue is that Indian politics is pretty driven by the masses. It is obviously a great political move to tell the people of your state to not pay these loans. Unfortunately, when microfinance in India stops the people will be much worse off.
I'd like to see much better regulation of the industry - for example if you cap the interest on the loans on the previous years' GDP for any single loan that would help. It would mean that a loanee would have a reasonable expectation of paying the loan back.
Really the repayment rates are surprisingly high for most MFIs...not sure how with such high interest rates. I know a lot of the American MFIs receive huge support from USAID and corporate foundations, so they can keep their rates down. but a lot of the foreign ones (I'm thinking comportamos in mexico and SKS in India--which just went public in july) that don't receive additional support and have to be self-sustaining have ridiculous interest rates. comportamos loans have something like 80% interest rates
It has some political componenet, yes. But in most cases the business opportunities provided by these microcredits sound great sitting in US/UK, but are pretty useless in real 3rd world situation. The following WSJ article showed how one of the major initiatives actually failed where you had the 'founder' of Microcredit involved.
"Two-and-a-half years later, Danone teamed up with Muhammad Yunus, the Bangladeshi who later won the Nobel Peace Prize for his microcredit program that lends money to poor entrepreneurs. Mr. Riboud and Mr. Yunus, having met over lunch, set up a joint venture called Grameen Danone Foods Ltd.
The idea was to sell an affordable seven-cent yogurt product called Shokti Doi—which means "strong yogurt." Fortified with vitamins and minerals, it was to be sold through local women who would peddle it door to door on commission. ... Within a year, though, Grameen Danone hit a wall: Milk prices soared, factory openings were delayed, and the saleswomen couldn't earn a living selling yogurt alone. Today, a significant portion of sales of Shokti Doi come from urban stores, not rural villages as planned."
http://online.wsj.com/article/SB100014240527487036151045753289434528927…
To repeat, these are great ideas in paper without much analysis, but not feasible ways to make everyone rich with 25% interest rate. The $100 laptop was worse though.
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