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Casual Friday: The Onion – Microlender Forecloses On Goat

April 1, 2011

In a piece which I think highlights some of the problems with micro-lending, this just in from the Onion:

SAN FRANCISCO—Representatives from One World Finance, a U.S.-based microcredit provider, confirmed Monday that they had initiated foreclosure proceedings on a goat in southern India following a borrower’s repeated failure to make her $2.20 monthly loan payments. “I tried to work with Ms. [Subha] Thangam on this, but once she fell a full $6.10 behind, I had to repossess the goat,” said loan officer Michael Conrad, who stated that he was just doing his job and that it was “not [his] fault” if certain subsistence farmers were living beyond their means. “I’d love to recoup the entire $22 loan at auction, but given the glut of foreclosed and abandoned goats in the area, I’d be lucky to get even half that.” Conrad also acknowledged that the owner had left the goat in “pretty bad shape” and had even stripped it of its hair for potential resale on the paintbrush market.

I’ve always been a bit skeptical about the micro-lending fad. For more analysis on micro-lending based on conversations with people who’ve actually worked in the field click here:

Analysis

To me it always seemed silly to ask for interest on a 20 dollar 6 month loan. But in the 2000’s micro-lending took off as the newest coolest liberal fad. Spurred on by the growing belief in the morality of the free-market, liberals learned there was a way they could save the world, ease their conscious, and make money.

The problem I always had with micro-loans was that it was America’s way of exporting a debt culture to regions which had, while previously been poor, at least not had to cope with the problems of a negative balance sheet. Micro-lending served to push debt onto people who already had so little, while spreading one of capitalism’s more insidious notions and less moral qualities. Remember of course, prior to the 1800s Christians were forbidden from loaning money at interest because of usury laws. Furthermore, it seems a bit callous to claim to be helping people while making them pay you interest. By that standard all bankers are saints. Of course, if you really are a free market junky, there are plenty of ways you can donate money to people in developing countries that invest in local markets (receiving interest doesn’t change much, and in fact probably makes it less likely some of the funding will go to useful economic things like education and disease prevention). In essence you’re likely just contributing to furthering debt peonage of the poor, as they are forced to work in some dead-end menial job to pay off the loan; rather than possibly developing necessary infrastructure. However, after talking with someone who had worked in the micro-lending field I learned the problems with micro-lending were much more obvious than my analysis.

Micro-lending doesn’t work, because the whole industry is a sham. The impoverished recipients of mico-lending know this and so what they do is treat it as a cash donation. This is in part cultural, and in part because they are crafty people. Mico-lenders usually have nothing to foreclose on and what this means is that there is no incentive to pay. Furthermore, my source informed me that it is common for micro-loan recipients to simply pay off one loan with another. Of course Americans do this all the time, but here it only works to a limited extent. In the micro-loan industry there is no communication between companies. As a result there is no way to track who is a good loan recipient and who has taken out lots of loans. This makes it incredibly easy to scam the loan agencies. The loan companies themselves are similarly corrupt, because what looks good to their investors is how big their portfolio is. This is based on the false premise that they are helpful, feel good organizations and so if they’ve loaned a lot of money to people they’ve touched a lot of lives. In truth, my associate has informed me they under report the default rates on micro-loans.

In short, the micro-lending industry is a fake. Its time to call micro-lending out for what it is… exploitative junk-bonds. It is a way for liberals to feel like they are doing good, making money, and smarter than you because they’ve figured out all the solutions to the global inequalities of the capitalist game. Their super brilliant solution is… hold your breath for it… : DEBT! Especially debt for poor people!

And we’ve all seen how wonderfully a culture of debt (and low wages) has worked out for America!

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2 Comments leave one →
  1. Vinay Bannai permalink
    April 1, 2011 7:26 pm

    There are real situations where micro lending has been known to work.
    I am not familiar with the success rate of the lenders in US and other developed economies lending money to people in emerging or impoverished economies. Having said that, in lots of poor countries and emerging economies there are cooperatives (the ones run by women tend to be more successful) where group of people get together and lend money to each other. This has known to work because, the lenders and lendees know each other and live in the same community and have a shared desire to make things work.
    In the micro-lending phenomena you mention, the lenders don’t personally know the lendees and the lendees may not think twice to default on a loan. Kinda a similar to the mortgage loan defaults in the US when the MBS took off and the loands were being financed by Irish banks to some sub-prime lendee.

    • April 5, 2011 1:19 pm

      I have heard of the type of micro-lending you’re using in your example mentioned in some economic studies, but am not too familiar with it. To me it seems a much better approach. It gets around the moral issue, of having a bunch of foreigners perpetuate debt on the poor while acting as though they’re doing them a favor. At the same time, it also gets around what is known in economics as the principle-agent-problem. This problem occurs when two parties have different interests and information within a contract.

      In the case you mentioned of community led lending, the shared desire to make things work (as you put it) helps ensure the loans make sense and go to good people and projects who can pay them back.

      I’m not sure, if what you are referring to is similar to what is discussed in this paper:
      http://www.iisec.ucb.edu.bo/papers/1991-2000/iisec-dt-1998-01.pdf
      If it is, my skepticism would remain based on the fact that you have large external lenders coming into small communities; although it certainly still is a better model than what is discussed above because it mitigates the principle-agent-problem (but only somewhat because it spreads risk – which we saw in the U.S. housing crisis didn’t really work).

      I think the best model would be one where the loan granters come from the same community as you’ve mentioned, or at least a local-non-profit type organization. Unfortunately, I can’t think of any papers on this off the top of my head.

      Things always get messy when big financial institutions stick their hungry hands into under-developed communities.

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