Debt can be toxic. So toxic in fact that on a large enough scale it can spark a global financial meltdown, or a developing world debt crisis that has crippled nascent economies’ growth. And relatively easy access to credit cards in the U.S., for example, can lead to a slippery slope of spiraling debt if consumers are not educated and risk is not managed. In fact, one of the more interesting (and controversial) plans at last year’s GSVC was an organization named GoalSpring that was offering services to help individuals manage their spiraling debt through virtual counseling and debt management software tools.
Debt can also be empowering. Microfinance, for example, is a leapfrog innovation to bring the economically marginalised into mainstream capital markets with small loans that help build micro-businesses. Traditionally, the risk of lending to those who have no assets is managed through the group-lending model, pioneered by Grameen’s village banking initiatives. And the financial success and social impact of micro-lending has led to a tremendous amount of investment, and a veritable explosion of a formalised banking sector focused on the poor.
But as credit becomes more ubiquitous among this segment of the population, wouldn’t it necessarily succumb to the same perils as unmanaged and uneducated credit card use in the U.S.? According to a recent WSJ article, this is exactly what’s happening in India. The preponderance of microlenders hoping to take advantage of the strong financial returns in this sector have all but lost focus on the social impact element to microfinance and have consequently instigated the same type of (micro) credit bubble that we’ve now seen far too many times.
This trend is disconcerting because hypothetically, as microlending institutions become formal banks, it’s a small step between lending and securitizing these loans for the capital markets, effectively amplifying the risk of lending to the poor. One large micro-financial meltdown and the flows of investment could drastically slow or even halt, switching off the prosperous tap of credit that is so vital to low-income communities. And as microfinance as an industry continues to grow, it can be too easy to lose sight of the fact that it’s still not a fully mature marketplace, and the lending is still happening to enterprising individuals who nonetheless are naive to the notion of credit, and are not educated in credit management. Increasingly, in a hurry to disburse microloans and begin receiving revenue from interest payments, loan recipients are not properly screened by lenders for factual evidence of current or future assets of a micro-business.
I really hope the microfinance industry as a whole will take a step back and consider its rapid and successful growth in light of the many historical learnings regarding debt and its discontents, for the sake of the industry and the communities that it serves.