Debate on whether microfinance works

Discussion in 'Kiva | Loans That Change Lives' started by freqflyercoll, Jan 30, 2012.  |  Print Topic

  1. freqflyercoll

    freqflyercoll Silver Member

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    Getting a bit intellectual about microfinance, I ran across a debate going on today between two authors that have written about microfinance.

    Links to the books written by the debaters (I haven't read either of these, but gonna try to do it before the KivaDO:
    http://www.amazon.com/Due-Diligence...6482/ref=sr_1_1?ie=UTF8&qid=1327933706&sr=8-1

    http://www.amazon.com/Why-Doesnt-Mi...=sr_1_1?s=books&ie=UTF8&qid=1327933735&sr=1-1

    Might be some interesting reading especially for those going to KivaDO, things to keep in mind or discuss with them.
     
  2. milchap
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    milchap Gold Member

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    Any insights from those learned in microlending?
     
  3. tondoleo
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    tondoleo Gold Member

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  4. misman
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    misman Gold Member

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    Even as a member and lender on Kiva, I am conflicted. Personally, I carry no debt, don't like debt, and don't generally think debt is a good idea. Then I go and loan Bertha in Honduras $25 to help her better her life. Call me a hypocrite if you want.

    I guess it is like the "give a man a fish/teach a man to fish" scenario.
     
  5. tondoleo
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    tondoleo Gold Member

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    Misman, you are not a hypocrite. You are a thinking human. Congratulations.
     
  6. YULtide

    YULtide Gold Member

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    I think jbcarioca will have some valuable and informed input to offer.
     
  7. Stephen
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    Stephen Gold Member

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    Personally I think the argument is against is a politically driven piece of trash, anyone that subtitles a book 'neo-liberal' has an agenda to label things in some realm or another and not to help or review something objectively.

    I have very political thought but despise labels. I too think loans are 'bad' but they have a great purpose at the same time when done in responsible ways. I do watch the partners I use and the various parameters given about them, as some are much less about helping and much more about profit(even if a non profit, still profiting their executives)
     
  8. canucklehead
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    canucklehead Gold Member

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    Agree, I have strong confidence in jbc's informed perspective!

    I also thought it was interesting to hear the words 'neo-liberal' in context of the discussion. I feel the moment labels are needed to describe a position, the argument has been lost. There are intrinsic pitfalls in microlending (high interest rates, risky ventures) but at a local level, I see it as being a net positive. The important aspect to query is does it build sustainable prosperity and that is certainly a question I have already posed to some of the speakers -- does the program work and are the income of the entrepreneurs Kiva supports enriched.
     
  9. nime01
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    nime01 Gold Member

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    Those are very important questions (not only for Kiva), and I believe jbcarioca with his extensive experience has at least some of the answers.
     
  10. jbcarioca
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    jbcarioca Gold Member

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    It has taken me some time to get here, but I have done so.
    I agree. I have zero debt myself. However, as an entrepreneur I carried substantial debt for capital expenditures, and I think mortgages, auto loans, investment and inventory finance are all good things to do.

    The micro-lending problem draws lots of polemics pro and con. The Cons specialize in finding abuses, and there are plenty of those to be found. The Pros tend to gloss over details and pronounce helping other people as a Good Thing, a mission for redemption from poverty. I am not too capable of unequivocal pro or con positions on much of anything. I find a fair amount of gray (silver lining if you're an optimist: clouds of you're a pessimist).

    Fundamentally the problems are:
    Micro-loans are not for the poorest people. The poorest people are generally starving or malnourished. They need help with subsistence, not loans.

    Micro-loans are not for the illiterate. They need to learn to rad and write first.

    Micro-loans are very expensive to make and collect. Anybody who tries to make money in the process can only do so by plundering the poor, who then are often made destitute. Check out the India stories. IMO skip the critiques of Younes from Bangladesh. Those were part of a domestic political furor caused when he was asked to run for President. Another long story.

    Micro-loans are great ways for small entrepreneurs who are literate and ambitious to have enough capital to do things to help themselves. For this, they work and work well. For other things they do not.

    Lots of people, including some Kiva fellows, will say you cannot tell the difference between a loan for home improvement or for business expansion. With respect, nonsense!
    I will not lend for education, home improvement, wedding expenses or consumption. Those are all good things, but none of them generate cash immediately. Micro-loans are expensive and short-term. They need to be directed towards things that will generate revenue quickly. So, a motorbike for ones own use NO!; A motorbike to be a taxi. Yes!; A motorbike to carry produce to market? Probably not, that is not a money-maker.

    In sum, the just criticisms are ones about lack of discipline or rip-offs.
    The naive optimists want us to ignore purpose. NO WAY!

    I learned the three "C's" of credit long ago. They are out of favor today but they still work.
    Character- stability and determination are not impossible to detect
    Capacity- if the application has no business they should nto have a loan. They should also have a capacity to repay. Cash flow analysis works for micro-loans.
    Common Sense:
    1) In micro-loans people do not usually have much experience, so they need help. Small groups help reduce costs, reduce risks and ease difficulties. Other things remaining equal, groups are better.
    2) This is not charity. It is a business and borrowers are making business transactions.
    3) Just as the Peace Corps found, Kiva Fellows need to find. Sending idealistic, over-educated, children to spread their knowledge to the ignorant masses is incredibly condescending. There is a great role for such people, but it is to learn, not to teach.

    A digression: when I was a mature man of 23 years I was in charge of a group of 50 employees, every oen of whom was older than I was, all of whom had more experience than I did. I arrived on the job, and the first day the #3 person in the operation asked to speak with me. She was three times my age and better educated too, but she was the wrong nationality. She told me to shut up and learn and that I'd do well when I learned what I was capable of and what I was not. I learned... I respect Kiva borrowers for they are working to run businesses under often grueling conditions. I do not think I could teach them much, but I can help them help themselves. That is all.

    I do not expect anyone to share my views, although I hope some do.
     
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  11. milchap
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    milchap Gold Member

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    Thanks for your insights on micro lending.
    I have printed out this post in order to digest your views and experience in microlending.
    I regret not being in SFO to hear more from you.
     
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  12. tondoleo
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    tondoleo Gold Member

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    I enjoy your sense of humor jbcarioca.
     
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  13. jbcarioca
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    jbcarioca Gold Member

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    I am glad you caught that! I was becoming concerned.
     
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  14. tondoleo
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    tondoleo Gold Member

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    It was hiding in plain sight. I didn't go to school for 22 years for nothing.
     
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  15. jbcarioca
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    jbcarioca Gold Member

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    Neither did I, although the first twelve years of it were not self-financed for me. It was very, very expensive! However, I did get lucky so all that money seems to have had a decent return. I still will not lend money for education of micro-borrowers because the payback is too long, and the micro-borrowers need other sources for education funding IMO.
     
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  16. miles and smiles
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    miles and smiles Gold Member

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    Finally the truth comes out. :D
    I accomplished the same in a mere 18 years. :p
     
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  17. tondoleo
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    tondoleo Gold Member

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    I am a slow learner.

    Thank you for taking poetic license with my statement and then quoting it.
     
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  18. freqflyercoll

    freqflyercoll Silver Member

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    I didn't have a chance to read everything in the debate, but I got the impression that maybe the debate centers more around whether there should be any government funding of microloans. For individuals like us who are trying to do this for charitable reasons, it's hard for me to see why doing this is too bad. The only downsides are encouraging unnecessary risk taking (because there's no interest and the lenders are taking on the risk in this deal) and also forgoing potentially better uses of our charitable dollars. However, if you were to send money to another charity that just gives handouts, that's even worse then helping someone set up a sustainable business.
     
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