What is microfinance about?

Tim Harford writes in the Financial Times Weekend Magazine about Microfinance. He is the author of Dear Undercover Economist.

This is a neat little survey of the field, but left me distinctly disturbed. Now I understood the origins of Microfinance to be affordable small loans to help the underprivileged in poor countries to start the process of lifting themselves, and so contributing to their nation.

Affordable to me describes the whole package. Small sums that are enough to purchase stock for the initial trading of a small business, or loans to households to supply needs. The repayments would be small and might not start for a while. And the interest rate would be very low.

In the UK this is not a new idea and was operated by the Midlands Tallymen, who loaned the money to buy clothing and domestic cottons and linens from sometime in the C19. They would lend about £10 at a time and seek repayments of about ten shillings (half a pound) a week for 21 weeks.

That is dear enough at 5% on a twenty week loan, an APR of about 12.5%, certainly not cheap for the time in question. But it dwarfs and pales beside the figure quoted by Harford from a study of a South African project with charges equivalent to 200%.

No wonder he says that the value of the system is questionable.

In Kenya a savings accunt paid no interest and charged ‘hefty’ fees for withdrawal. That just seems an activity run by sharks.

That is a killer charge; it makes no sense to me if its purpose is to help the less fortunate. But in my research over the banks across the world, and the profit seekers who treat no one with sympathy it is all too familar.

In analysing the new Lending Code I find that Microfinance has become a word for the banking community. But they define a micro-enterprise as a business employing fewer than 10 people and with a turnover or asset total approaching £2million.

That certainly seems small, but Micro?

Actually it is a European Union definition! This suggests some confusion of understanding about the idea, though the effect that the smallest businesses should be treated with more care and responsibility than the bigger ones is a positive approach to the learning curves faced by those developing them.

I wouldn’t want to discourage any of this, but I am sorry to see so much opportunism creeping in.

Perhaps it needs a while longer to settle down into a sound international system.

Joseph Harris – Debt Control Man

 http://www.controlyourdebtcrisis.co.uk

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