Microfinance has its fair share of critics, especially lately, as the debate about astronomically high interest rates hit the pages of the New York Times. A more in-depth and nuanced perspective on accountability of MFIs can be found at the on-going conversation at the Give Well blog.
The critics are right; such high interest rates are counterproductive and based on faulty expectations. How can we expect the world’s poorest to use loans for entrepreneurship, when our own life experiences show that most people just aren’t entrepreneurs?
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I visited the home of a woman in our community today. She’s young, even younger than me, and she’s married with a son. I went to check on her because she had told me last time we met that her family might be moving because they couldn’t afford their home. This conversational aside was surely more than casual conversation; people often “happen to mention” their financial difficulties to me, hoping that I can help. Most of the time I don’t, simply because I don’t personally have the money and because my job has nothing to do with giving money or loans.
I wanted to follow up with this woman though, even though I knew I could not help directly. She might have been a candidate for a partner organization’s program offering funding for school children and home rebuilding. She wasn’t; since her son is too young to study, their family does not qualify. As she told me about her business selling snacks on the street, she explained her finances. “That’s one of my biggest expenses,” she said, pointing to a decrepit bicycle with a big basket strapped on the back. “Every day I have to pay 2000 riel to rent the bicycle, and 1000 more for the basket.” Which is a lot for her no matter how you look at it, because every day she takes in a total of 6000 riel, just over a dollar and a half, without even accounting for initial cost of the snacks. More than half of her total revenue is going to rent this bike, the crappiest bike I’ve ever seen.
This woman isn’t a particularly motivated or skilled entrepreneur. She’s never been to school, cannot read or write, and is making a living the same way that most people around her are. A $20 loan would simply allow her to buy a bicycle and basket. It’s not going to expand her business, reach more customers, or sell more profitable goods. But it might erase the decision between rice and sanitary pads, baby formula and soap, clean water and antibiotics. At a 10% flat interest rate,* making weekly payments equivalent to what she pays to rent the bicycle now, she could own the bicycle and basket in less than seven weeks.
Microloans for entrepreneurs have their success stories and failures, and I am in no particular rush to see an MFI start working in my community. But when it comes to small amounts of money that could greatly change women’s lives, I wish that microloans were easily available to women like the one I visited today.
* There are at least six common ways to charge interest on microloans, outlined at MicroLinks. A flat interest rate is admittedly the most straightforward of the variations (especially helpful since all I remember from Microeconomics 101 are some vague graphs with Xs on them).