Friday, October 13, 2006

Microfinace

Weird! I was a little disappointed that Eugene Fama failed to win the Nobel, but the field of finance ended up being represented after all. Grameen Bank, the inventors of microfinance, won the Peace Prize.

I think the jury is still out on microfinance in an important way—it seems to me that it needs to be widespread enough that one can see actual improvements in an economy. Grameen has been operating in Bangladesh for 30 years. Since 1980, the per capita GDP has increased annually by 3.4%, according to the World Bank. That doesn’t seem so great, especially compared with other poor nations. (Compare it to 5.7% for Malaysia in the same period.)

This is probably unfair—the better measure would be to compare Bangladeshi Grameen clients with non-clients.

One really interesting thing about Grameen is the new concept of collateral that they pioneered. Since the recipients of their loans don’t own things or have legal title to what they do own, Grameen came up with a way to group borrowers together and make them collectively responsible for each other paying. Moral suasion, status in the community, fear of disapproval and/or letting down their friends are the motivators. I think informal immigrant finance networks work this way sometimes, and may be where Grameen got the idea.

In any case, I like that Grameen won. They are all about using a capitalist tool—credit—to improve people’s lives. But their approach to credit is designed for the local culture (instead of imposed by ignorant outsiders) and is scaled in such a way to allow the poorest of the poor to participate. It understands that entrepreneurs can exist even among the poorest, if capital is available. That’s a beautiful idea.

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