The limits of microcredit

Plenty of people are enraptured by the possibilities of microcredit, but not Aneel Karnani. In a recent Michigan working paper, Employment, not Microcredit, is the Solution, he writes:

Most studies suggest that microcredit is beneficial but only to a limited extent. The problem lies not with microcredit but rather with microenterprises. With low skills, little capital and no scale economies, these businesses have low productivity and lead to meager earnings that cannot lift their owners out of poverty.

Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. The government is responsible for providing public services that are critical for increasing the productivity and the employability of the poor.

Comments

[Arthur Eckart]

It seems, microcredit is more effective in developing countries, where credit for many is difficult to obtain, than developed countries. Most businesses fail anyway and anywhere. If 1% of businesses succeed to where several hundred jobs are created, then microcredit is effective. I didn't see any data on how many jobs were created, or how many small firms became large firms, through microcredit.

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Muhammad Yunus, Nobel Peace Prize winner, first loan:

"I saw how people suffered for a tiny amount of money. They had to borrow from the moneylender, and the moneylender took advantage of them, squeezed them in a way that all the benefits passed on to the moneylender and none remained for the borrowers. So I made a list of people who needed just a little bit of money. And when the list was complete, there were 42 names. The total amount of money they needed was $27. I was shocked. Here we were talking about economic development, about investing billions of dollars in various programs, and I could see it wasn't billions of dollars people needed right away. They needed a tiny amount of money. This was in 1976."

"She was making bamboo stools and earning only two pennies a day. I couldn't believe that someone could make only two pennies for crafting such beautiful stools. After a discussion with her I found out she had to borrow money to buy the bamboo, which cost only 25 cents. But she didn't have the 25 cents. So she had to borrow it from the trader, who agreed to lend it to her on the condition that she sell the bamboo stool to him when it was finished at a price that he decided. I wanted to give money to people like this woman so that they would be free from the moneylenders to sell their product at the price which the markets gave them -- which was much higher than what the trader was giving them."

"The villagers got very excited that I gave them the money. To them, it was like a miracle. Seeing this, a question came to my mind. If you can make so many people so happy with such a small amount of money, why shouldn't you do more of it? Why shouldn't you reach out to many more people? I could do this by linking these people with a bank that could lend them the money. So I went to the bank and proposed that they lend money to the poor people. The bankers almost fell over. They couldn't believe what had been proposed to them. They explained to me that the bank cannot lend money to poor people because these people are not creditworthy. So a long series of debates began with me and the banking system. Finally, I resolved it after about six months by offering myself as a guarantor. I said, 'I will sign the loan papers. I will take the risk, and you give the money.' I got the money and gave it to the people. And luckily for me, all the people paid it back. The banks had been saying that I would never get the money back and would ultimately have to pay it back myself. I said, 'I don't know anything. Let me try it out.' And I tried it, and it worked."

"Today, if you look at financial systems around the globe, more than half the population of the world -- out of six billion people, more than three billion -- do not qualify to take out a loan from a bank. This is a shame. What kind of institutions have we built that cannot afford to extend their services to the majority of the people?"

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1147

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