Micro Finance and Development

Below is a guest post by Trey Malone on micro finance and its relationship to development. Soon he will follow up with reflections on micro finance and the Pope’s economic ideas as explained in Caritas in Veritate. Please write your comments, support and criticism on the blog comment interface and Trey will eagerly respond. Thanks Trey.

In the development discussion, various schools of thought arise from those in the “developed” world.  Some theories advocate the environmental resources protection while others promote life destruction through maintaining an artificially low birth rate.  Others still, such as that of the “Shining Path” Communist Party in Peru, advocated governmental central planning.  Some favor a “hands-off” approach while others, such as the IMF, request quite a bit of leverage in any developing country before they will assist.  With each philosophy, though, the fundamental question to be answered is the same – how can resources be efficiently distributed to provide the greatest good for the greatest amount of people?

About twenty-five years ago, however, Nobel laureate economist Mohammed Yunus (Biography) created a new tool to provide assistance to the bottom half of the bottom half of those impoverished – microfinance.  The concept is simple – Microfinance Institutions (MFI’s) lend small amounts of money to a would-be entrepreneur who only has the collateral of his good name (social capital).  That entrepreneur has a unique competitive advantage – the knowledge he or she has accumulated about the society in which she exists.  That knowledge, while ignored in the context of many quantitative theories, cannot be forgotten (Hayek: The Use of Knowledge) and must be valued.  To protect the culture, development should be based within a community, and microfinance creates a unique opportunity for precisely that.  Generally, MFI’s require its lenders to form a sort of accountability group, and will regularly offer business assistance to those who have received the loan.  The success of the Yunus model for micro-lending, while difficult to quantify, has led to various life improvements in more than 100 countries today – including the United States.  The system does, however, provide one important debate topic in today’s patriarchical society (defined as a society where economic authority is held primarily by the paternal figure) – generally MFI’s try to lend to women.

The decision to lend primarily to women comes from many quantitative studies on family budgeting.  According to Catholic Relief Services,

“Studies indicate that women are more likely to use their loans and profits to benefit their families by investing in their businesses and using additional income to meet household needs such as purchasing more and better quality food, improving family housing and health care, paying children’s school fees, and saving for emergencies.”  (CRS)

The website goes on to point out that women and children tend to be the poorest of the poor and in most need of day-to-day assistance.  Therefore, the lending practices of these MFI’s actually focus more on the family.  Of course, in cultures where a sense of machismo prevails, lending of this sort can lead to unrest.  On the other hand, oftentimes women who receive these loans look first to their husbands as the business’ first employee.  The social entrepreneurship promoted in this lending system supports the free market in each community and empowers the most impoverished to pull themselves out of the low standard of living they currently experience.

Recently, microfinance has received quite a bit of media attention for serious allegations against certain styles of lenders.  SKS Microfinance (SKSM.BO), for example, has been in question since they began using a new business model that utilizes publicly traded stock to boost revenues for loans.  This new emphasis on greed highlights the ambiguity of market regulations.  Exorbitant interest rates combined with unorthodox collection practices (MFI’s lower Interest Rates) have been blamed for recent suicides and outrage in the emerging markets.  Whether the allegations are true or not have yet to be proven, but the current issues provide a strong launching point into the debate of whether regulation or market correction should be in control of socially just economic development.  Another important question is simply this, “Can greed be used for good?”

To learn more about microfinance visit Kiva’s website.  They also provide a way for any person to become directly involved with lending money through these fantastic organizations.

3 thoughts on “Micro Finance and Development

  1. Looks like very important work. I checked out micro finance in the Pope´s encyclical caritas en veritate, and he seems to consider it laudable because it is an economic policy that is, first and foremost, person-centered. Are there any others who write about micro finance in this sense?

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