Microcredit in Crisis

Today is Wednesday, 14 April 2010.

The “invisible hand of the market” fails again.

Microcredit, as originally conceived, has had many beneficial effects. The practice consists of making very small loans (often no more than US$100) to previously “unbankable” poor persons, who use the capital to develop micro-businesses which supplement other income, often significantly improving their quality of life. The interest rates charged were kept purposely low, covering only actual operating costs and re-lending of repaid loans.

Then for-profit financial institutions discovered that many of the “unbankable” were actually “prebankable”, and entered the field. Since their only concern was making profits for themselves, and not helping the very poor improve their lives, they quickly began to charge predatory rates (as high as 125% APR).

This was possible since there is no global regulation of financial institutions, and, in individual countries (including the USA/USE), regulation is frequently lax due to the large sums of money which can be funneled to elected and other government employees. (One prime example is the odious Senator Mitch McConnell (Republican – Kentucky), a major opponent of sanely regulating Wall Street and other financial institutions.)

In a decent world, microcredit would be rehabilitated by restricting its operations to not-for-profit organizations.
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(For more information, see today’s The New York Times:
http://www.nytimes.com/2010/04/14/world/14microfinance.html?hpw)