Debt, and its discontents.

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.

equitybank_mDebt 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.

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3 Responses to Debt, and its discontents.

  1. cindy333 says:

    Abhay,

    Excellent points, and definitely a trend that I too find troubling. One thing that I find interesting is that while lending to the poor is on the rise in developing countries due to the increased penetration of microfinance, in the US there is still a huge mistrust of banks by the poor. A recent New York Times article talks about the poor and the immigrants in New York City who are not putting their money in traditional financial institutions but instead stashing it under beds or sending it back abroad. So often we focus on poverty in different countries, but neglect to see the barriers we’ve erected for the poor here in our very own country — the many requirements to open a bank account (e.g. social security number, mailing address), the high fees and minimum balances, etc. Instead, check cashing and corner bodegas are often the ones handling the financial transactions for the poor — often at absurdly inflated rates.

    http://www.nytimes.com/2009/08/18/nyregion/18cash.html?_r=1&hp

  2. abhay_nihalani says:

    Totally agree. Was thinking the same thing earlier this summer when i read this article: http://www.nytimes.com/2009/07/12/opinion/12ehrenreich.html

    The double standard you’re highlighting and that this article conjures is totally absurd. Think about the multi-billion dollars of free flowing foreign aid that has gone to governments of developing countries over the past couple decades and been squandered with corruption and middlemen, with impunity and unaccountability. The poor outside the U.S. are to be helped and saved, while the poor inside of our borders are to be treated like common criminals jockeying the system? What’s worse is this crack down on economic safety nets for the poor like welfare during a recession caused by unchecked jockeying of the financial system by the Wall Street.

    Kills me.

  3. cindy333 says:

    Ahh, yes Barbara Ehrenreich. So far she’s emerged as the leading voice trying to shed light on the plight of the working poor in America. If you haven’t read it yet, I highly recommend checking out “Nickel and Dimed” which is her reporting on life as a WalMart clerk in middle America (and other part-time jobs). Very revealing — and I almost see her as our generation’s Jacob Riis. (Riis took photographs of New York slums in the 1880s to try and create social awareness about the squalid living conditions and poverty in his publication “How the Other Half Lives.”)

    A couple of links to keep people busy:
    http://www.barbaraehrenreich.com/books.htm
    http://en.wikipedia.org/wiki/How_the_Other_Half_Lives
    http://www.authentichistory.com/postcivilwar/riis/contents.html

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