In Business Small Wonder

When you first hear about microfinance, it sounds almost magical.

Most commercial banks shun poor people because they do not have the property that conventional banking requires clients to put up as collateral for their loans.

So in many countries the poor who need to borrow are forced into the hands of money lenders and have to pay extortionate rates for their loans.

Poor people are bad risks, the conventional argument goes. But that may simply not be true, and informal lending has been proving it for centuries in places shunned by commercial bankers.

But the internationally-recognised new wave of microlending really took flight about 30 years ago. Clever people involved in aid and social projects realised there were principles and practices growing out of village or community life that could be put to work to redefine lending to poor people.

There was an explosion of this in Bangladesh, a newly-created country with huge-scale poverty. People such as Professor Muhammad Yunus of Grameen Bank (Grameen means village in Bengali) and Fazle Hasan Abed of BRAC (the initials are just initials these days) pioneered community microlending on a huge scale, with eventually millions of borrowers.

They are mainly women. They borrow the equivalent of $30 or $300 to buy a cow or chickens or rickshaws.

Scrutiny

Many of them have an entrepreneurial drive. The cow becomes a herd; the herd becomes a shop, the rickshaws become a fleet.

Bigger loans finance each step of the way; the money is repaid in weekly instalments as the women gather to chat about their successes. Maybe they band together to help out when one of the group finds repayments difficult. Maybe the scrutiny of the group keeps the repayments coming in.

The loans are often not cheap; 20 percent interest or more. They are repaid quickly, often within half a year, normally from the proceeds of the micro business the loan has financed. Each step of the way the borrowers are building a credit record in their passbooks.

One small microfinance organisation I encountered in Dhaka had collectors out in the slums taking in repayments on a daily basis ... tiny sums of money. Now the pride of the borrowers about what they achieve with their micro-loans is infectious.

But in recent months there have been shadows over the miracle reputation of microfinance with its entrepreneurial zeal and its amazing repayment record. The movement has attracted western investors seeking solid counter cyclical homes for some of their money and the implicit kudos of helping the poor.

Too big an infusion of money from the west may undermine some of the conservative principles by which microfinance appears to have prospered: the intense know-your-customer basis of community lending, or the business principles behind the loans.

Some experts worry that competition between lenders is making it too easy for the poor to borrow, that poor people will be tempted to buy consumer goods with the loan, not invest in a little business.

Sharks

After all (say the critics) the sub prime crisis in US housing lending was started when the international bankers got involved in the process of selling on the loans that had been sold to poor American consumers who wanted to buy a house. Laudable aims, horribly corrupted by the great loan packaging system of American banking.

Well, there were few signs that microlending is faltering from my trip to Bangladesh, one of the homes of the modern wave of microfinance.

Yes the interest rates are high, but not as high as the old fashioned loan sharks charge. Yes some people are buying goods rather than building small businesses, but are the poor not allowed to be consumers too?

Some critics are worried that too much has been claimed for microfinance; they find little evidence that it has really helped people out of poverty, which is what the enthusiasts claim. Like so many seeming wonders, it is not really magic. (Though it has to be said that Bangladesh has been growing fast in recent years, and the country has also notably reduced the proportion of the population said to be living below the poverty line of US$1 a day.)

But against the criticisms you have to place the experiences of those women borrowers: the stories they tell you about building their tiny businesses.

I once asked the Nobel Peace Prize winner Muhamad Yunus about the extra pressure that a microloan business put on women who were already bearing so much of the brunt of bringing up a family in the developing world.

His response was simple. "Yes, but have you seen their faces?" he replied.

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