Does microcredit fuel investment?
Cato released a new study today, "A Second Look at Microfinance", that considers the history of economic development and questions whether microcredit can do much to promote investment and growth. In it, author Thomas Dichter finds that economic growth usually comes first, and then credit becomes available more widely; even then, that credit is for consumption, not investment. From the conclusion:
The average poor person in the past (and today) is not an entrepreneur, and when he or she has access to credit it is largely for consumption or cash flow smoothing. The average entrepreneur prefers to start with informal credit or savings rather than formal credit.
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The interest in 'Micro Credit' is normally over 25%. It is alledged that the NGOs in Bangladesh involved with micro credit are minting money through this system, which is a recognized mony lending system that largely benefits the lenders at the toiling costs of the poor borrowers. Can some one investigate into such allegations?
Posted by: Junaid K Choudhury | Oct 27, 2007 10:55:32 AM
In the traditional situation the poor is always trying to make the ends meet, and micro-credit loans are found to help them in smoothing the cash flow as mentioned earlier. After a few repayments of consumption loan (not in the records), the individual is guided into making some investment with the prospects of having profit in the medium term. Very few however become successful entrepreurs. Even then it is found that poor end up taking loans from multiple NGOs to keep their repayment schedule and remain credit worthy.
Yes, the NGOs do have systematic operations that thrive on interest from loan to the poor. Only the very large NGOs or micro-finance institutions actually mint away large sums, while others do more than survive.
Posted by: Dr. Hasna Khan | Nov 1, 2007 10:47:54 AM