Microfinance • 12 April 2008 • The SnowBlog
Microfinance
I don't want to bore everyone with a lot of theory, so let me put the conclusion bit first. Sometimes people just need a loan to get their lives off the ground. I'm not really talking about Westerners. I'm talking about people who, if they could afford to buy a few tools could set up a mechanics garage or if they could afford a sewing machine could make and repair clothes. I just came across Kiva.com which makes small loans for just that sort of thing. It seems like a pretty cool way to put some cash to work. Plus you can look through all the projects and decide whether you want to help someone grow flowers in Senegal or open a general store in Ghana. Take a look. Now on to the boring bit. Capital is the basis of capitalism and without it you're stuck. You need those start-up funds so you can get going so you can get some income coming in so that, among other things, you can pay back your start-up money. A few years ago I read a fascinating book by Hernando de Soto called The Mystery of Capital and it was basically an exploration of why capitalism, that supposed miracle of economic transformation, didn't seem to work in the third world. Were brown-skinned people lazy perhaps or too corrupt? Or perhaps they're all stupid. The book's conclusions were both surprising (because it's an answer no one seemed to have thought of) and dull: most third-world countries lacked property infrastructure. That's to say it was often difficult to prove that you owned a particular house or piece of land. Which was a problem because land and houses are the main source of collateral for loans. These countries also tended to lack the legal infrastructure for administering contracts and resolving disputes. So, the borrower couldn't secure their loan against their house and the lender couldn't get their money back if things went wrong. Which is really a roundabout way of saying that there was little capitalism because there was little capital. But the book also looked at what happened when capital was available and, you will not be surprised to learn, that even people in hot, dusty countries can work hard, be ingenious and honour their obligations.
That's why the idea of microfinance (which just means making small loans to poor people) is such a great one. If you're not a big fan of capitalism but you want to help poor people, this is a great way to do that. But if you are a big fan of capitalism, then your own beliefs tell you that the best place to lend money is to the people who need it the most because they are both the most motivated to put it to work as well as being in a situation that's so capital-starved that there's almost no competition.
In a way, it's the exact opposite of the credit crunch that's poisoning the big money markets right now. After the dot-com crash in 2000, there was a glut of investment money with nowhere to go. Stocks seemed like a bad bet, so investors tried investing in markets that already had all the money they could handle. They invested in property and lent to homeowners. But because neither of those sectors were short of cash, they caused a property bubble by bidding up the price of houses on the one hand and created masses of precarious debt by putting mortgages into the hands of people who couldn't pay them on the other. Whereas, if that glut of cheap cash had been poured into under-invested areas - i.e. had been used as microfinance in developing countries - there's every likelihood they would have caused a boom in the world economy rather than risking a crash.
So that's the theory over with. I'm going to figure out what I could afford to loan a hazelnut seller in Azerbaijan. Or maybe it should be a start-up beauty salon in Togo. The thought that the money I spend on my weekly shop at the supermarket could set up a business is just a little bit mind-boggling. And more than a bit tempting too.
Rob
I don't want to bore everyone with a lot of theory, so let me put the conclusion bit first. Sometimes people just need a loan to get their lives off the ground. I'm not really talking about Westerners. I'm talking about people who, if they could afford to buy a few tools could set up a mechanics garage or if they could afford a sewing machine could make and repair clothes. I just came across Kiva.com which makes small loans for just that sort of thing. It seems like a pretty cool way to put some cash to work. Plus you can look through all the projects and decide whether you want to help someone grow flowers in Senegal or open a general store in Ghana. Take a look. Now on to the boring bit. Capital is the basis of capitalism and without it you're stuck. You need those start-up funds so you can get going so you can get some income coming in so that, among other things, you can pay back your start-up money. A few years ago I read a fascinating book by Hernando de Soto called The Mystery of Capital and it was basically an exploration of why capitalism, that supposed miracle of economic transformation, didn't seem to work in the third world. Were brown-skinned people lazy perhaps or too corrupt? Or perhaps they're all stupid. The book's conclusions were both surprising (because it's an answer no one seemed to have thought of) and dull: most third-world countries lacked property infrastructure. That's to say it was often difficult to prove that you owned a particular house or piece of land. Which was a problem because land and houses are the main source of collateral for loans. These countries also tended to lack the legal infrastructure for administering contracts and resolving disputes. So, the borrower couldn't secure their loan against their house and the lender couldn't get their money back if things went wrong. Which is really a roundabout way of saying that there was little capitalism because there was little capital. But the book also looked at what happened when capital was available and, you will not be surprised to learn, that even people in hot, dusty countries can work hard, be ingenious and honour their obligations.
That's why the idea of microfinance (which just means making small loans to poor people) is such a great one. If you're not a big fan of capitalism but you want to help poor people, this is a great way to do that. But if you are a big fan of capitalism, then your own beliefs tell you that the best place to lend money is to the people who need it the most because they are both the most motivated to put it to work as well as being in a situation that's so capital-starved that there's almost no competition.
In a way, it's the exact opposite of the credit crunch that's poisoning the big money markets right now. After the dot-com crash in 2000, there was a glut of investment money with nowhere to go. Stocks seemed like a bad bet, so investors tried investing in markets that already had all the money they could handle. They invested in property and lent to homeowners. But because neither of those sectors were short of cash, they caused a property bubble by bidding up the price of houses on the one hand and created masses of precarious debt by putting mortgages into the hands of people who couldn't pay them on the other. Whereas, if that glut of cheap cash had been poured into under-invested areas - i.e. had been used as microfinance in developing countries - there's every likelihood they would have caused a boom in the world economy rather than risking a crash.
So that's the theory over with. I'm going to figure out what I could afford to loan a hazelnut seller in Azerbaijan. Or maybe it should be a start-up beauty salon in Togo. The thought that the money I spend on my weekly shop at the supermarket could set up a business is just a little bit mind-boggling. And more than a bit tempting too.