Saturday, January 30, 2010

Microcredit: yea or nay?

Readers, I need your input. I am considering participating in Kiva. I am aware of some of the criticisms of microcredit, but unable to assess them. Naturally, this means that I will try to research the matter as thoroughly as I can. However, given the realities on the ground, I think it probably will take a year or more before I feel I have anywhere near the information needed to make an informed decision. So, here is the question: in the meantime, do I contribute or not?

I am not so much concerned about inefficiency, even if my funds do end up primarily enriching lenders—as Peter Singer has pointed out, if the best available way open to me to save someone's life is one in which 90% of my funds get skimmed off the top, that just means I have an obligation to contribute ten times as much.

My worry is that I will end up trying to hurt the people I am trying to help. One of the criticisms of microcredit is that, in practice, it ends up working like a Ponzi scheme once one gets to the lender level. There is no reason why microcredit must work this way, but I also can see how it might: it seems that it must depend on the average success rate of the entrepreneurs' businesses. This, in turn, is something for which detailed empirical data must be marshaled (and has been—but that's where the disagreement appears to be, which is what makes it so difficult for a layman to wander in). If microcredit tends, in practice, to work like a Ponzi scheme, then it must hurt more than it helps. But if it usually does not work that way, then the time I delay is time that I am not helping people who need it.

What do I do while I am researching?

1 comment:

Ryan Calkins said...

I won't try to pretend that I'm an objective commenter. I am an advocate of microfinance, and to a lesser degree microcredit. These terms are often used interchangeably, but are not synonomous. The former refers to the larger scope of financial services for the poor (credit, savings, insurance, etc.) and the latter strictly to the provision of credit to the poor.

My advice to you would be to pick one of two types of microfinance institutions who post loans on the Kiva site. The first would be an MFI that builds in a savings program for its borrowers. The second would be an MFI that uses its microcredit channels to support other poverty alleviation efforts, such as healthcare or education. An excellent example of an organization that meets both of these criteria is Pro Mujer.

The other option is to read the further information about the MFI disbursing the loan. They are given 1-5 diamond ratings. Lend only to those who achieve the highest rating and it's a safe bet that you're money won't be skimmed.
Ryan Calkins