Microloans May Work, but There Is Dispute in India Over Who Will Make Them
Thursday, August 10, 2006
Tyler Cowen, co-author of Marginal Revolution, reports for the New York Times from Hyderabad:
“My visit suggested that microfinance is working, but it is often more corporate, more commercial and under more attack than I had expected.”
He goes on to describe the tension between state-sponsored microfinance programs and private ones, with interesting anecdotes sprinkled in. MICROFINANCE is based on a simple idea: banks, finance companies, and charities lend small sums ? often no more than a few hundred dollars ? to poor third world entrepreneurs. The loan recipients open businesses like tailoring shops or small grocery stores, thereby bolstering local economies.
But does microfinance, in fact, help the poor?
To help answer this question, I visited Hyderabad, India, in June. The Poverty Action Lab at the Massachusetts Institute of Technology, run by Abhijit Banerjee and Esther Duflo, economics professors at M.I.T., and Sendhil Mullainathan, an economics professor at Harvard, has begun a study of microfinance in Hyderabad. The lab is monitoring thousands of borrowers from Spandana, one of the largest microlenders in India. At the end of a two-year trial period, the study will compare microfinance recipients to peers without comparable opportunities. The lab looks for the real-world equivalent of controlled experiments to study which programs actually alleviate poverty; this work is one of the hottest trends in the economics profession today.
My visit suggested that microfinance is working, but it is often more corporate, more commercial and under more attack than I had expected.
Microfinance is not actually ?micro? in scale. It is far more organized than the individual moneylenders in poor communities, the traditional source of finance. Spandana borrows from banks, has about 2,000 employees and deals with about 800,000 loan recipients. The resulting economies of scale make possible lower interest rates. Spandana has been lending at interest rates of 10 to 15 percent a year, while other Indian microlenders may have rates ranging up to about 30 percent a year. Traditional moneylenders receive 5 or 10 percent a month or more. It is no wonder that Spandana has grown.
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