Thanks for this, John - it's clearly true that what people usually need is cash, not pressurising business investment.

What I fail to see is why I can buy a settee for my house for £300 on 6 months interest free credit, yet Grameen charges upwards of 50% interest for a similar loan. Or at least I don't fully understand the disparity - is Grameen trading on the brutality and self-indulgence of money-lenders?

I would certainly advocate a strategy, where rural development products, such as water pumps, ploughs, tractors, stoves etc. could be registered to receive interest free credit through overseas aid funding. This links the lending directly to purchase of "economically infusing" products. This would leave microfinance to handle to totally legitimate health, education, hunger cash shortfalls that are prevalent in the more chaotic economies.

Has this type of "interest free credit" been done anywhere? I could use it right now, if so.

Why are microcredit interest rates so high?

The nature of microcredit – small loans – is such that interest rates need to be high to return the cost of the loan.

"There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums." (CGAP)

My undestanding is the average MFI loan interest is in the 25-35% range, whereas local moneylenders charge 500% or more. One challenge now is making sure even MFI's don't engage in predatory practices. For instance, looking for collateral or threatening time in jail for late or missed payments is often a normal practice now...but seems not really in the true spirit of microfinance.

Reading through the Edge Annual Question last night I thought to myself: "God I love these atheists!" Intellectual consistency isn't my strong suit.

Tyler Cowen is a Libertarian. I'll admit being put off by lots that comes out of the Cato Institute and other Libertarian thought. Cowen's contributions at the wonderful Marginal Revolution tend to confirm his thoughtful humanism--most of the time.

Mark's point about the importance of process and legitimate institutions for microfinance seem an important point of the essay. Many prefer to get institutional loans even when loans from moneylenders are more convenient. Getting people enrolled in institutional loans has the advantage of getting them to think about other types of institutional financial services.

The points about savings seem particularly important. And more thinking about savings is very important from a microfinance point of view.

In the West it's easier to understand that the business money isn't yours than it sometimes is in developing countries. That distinction is rather fundamental, but often quite hard to draw in the real circumstances of people.

"People who have even extremely modest wealth are also asked to perform more community service, or to pay more to finance community rituals and festivals. In rural Guerrero State, in Mexico, for example, one of us (Cowen) found that most people who saved cash did not manage to hold on to it for more than a few weeks or even days. A dollar saved translates into perhaps a quarter of that wealth kept. It is as if cash savings faces an implicit “tax rate” of 75 ­percent."

I was really impressed by Munnu Morrish starting a thread, A Village Savings and Credit Society in Gulu partly because the "savings" came before "credit." But it quickly became clear in that thread that I didn't have many ideas about the "savings" part of the equation.

Amartya Sen is well-known for introducing a capability approach to thinking of solving economic problems. I think it's very helpful to think about both savings and credit from this perspective. And when we do many of the assumptions we take for granted in the West aren't immediately translatable into other local contexts.

Ben had great things to say on Munnu's thread. And in general Ned is such a great platform for discussing issues, for one reason that we can never get too far afield from considering actual work on the ground. Like Ben I need to be engaged in making a living where I am. By looking at the problem of savings and lack of innovation on the savings side in microfinance in the developing world, it provides a way of looking at financial institutions in the West.

Here in the USA there's much about the housing market bubble. My sense is that the crisis reveals deep cracks in our financial institutions and how we imagine savings instruments.

Innovations on the lending side are very important, but they must be joined with innovations on the savings side too. The sorts of solutions envisioned in the West may not be the same as for Gulu. But in both places there's a need to imagine institutions on both sides of the economic equation.

what sometimes disturbs me slightly about the microfinance fad is two fold:

1. private enterprise is possibly the most important engine of economic growth, but everyone who has access to the means to start a private enterprise is not necessarily a good business person. In the USA every year thousands of small business start-ups receive financing and fail - this is also true where microfinance is concerned, compounded by low levels of basic education among the poor.
2. do the we who preach savings led credit actually practice what we preach? Is it true in the "developed" world that credit associated with proportional levels of savings are what has enabled us as a society to get ahead? I remember a time when I had student loans and a car loan and credit cards and a mortgage, and not a cent to my name in savings. I am not certain I would have been able to achieve all that with a savings requirement in place up front.

Exactly, not everyone should be a business owner (and/or is a good business person).

I would think a good microfinance (MFI) would also offer some form of business feedback and guidance in the process...that would seem to be a good addition to the program.

Actually, it's a very fine line to walk. If I give you business advice and lend you capital to start that business, then who is liable for the loan if you fail? You might argue that the failure was due to my bad business advice and decide it was justifiable not to repay.

Excellent point. I guess you could separate the two, but the advice giver could always be assigned some blame.

Like any VC/angel startup venture...the money is in a place to offer advice and contacts to help the biz get to the next level. Tho in those deals, when the biz starts to tank, they look for some type of liquidity event...not quite the MFI route.

When you had all those loans to pay and "not a cent to my own name" you might also have been working and paying into Social Security. Social Security is a form of forced savings.

It's very difficult to save under any circumstances. Cowen's observations in Mexico about how savings were essentially taxed at a 75% rate because people with modest means have social obligations seems really important. What vehicles are there for poor people to save without loosing principle? That question seems an important part of the financial services for poor people.

Cowen points out that investments in livestock can be a form of savings. He mentions cows, but goats are the more ubiquitous savings investment. I don't have the link, but I've seen studies which show when people invest directly in livestock rather than having livestock given to them, they take better care of the animals.

Burial insurance is another form of savings. But it seems to me that banking products can be tailored for the needs of poor people. Here in the US Christmas clubs used to be popular as an entry level product. Indian banks in particular have introduced savings programs for children. The street kids bank perhaps is a model for community groups trying to provide banking products to encourage savings.

Whether livestock or tangible products like building materials, poor people often want to find ways to create savings without loosing value--Cowen's 75% tax on savings. Forced savings like social security also might play a role in savings without loosing principal.

People in the USA buy a house on credit and pay back over a set amount of time. This mortgage system seems entirely inappropriate in the developing world to produce community housing. But inventing useful systems an institutions is of course no easy matter.

Google.org has begun a Small and Medium Size Intiative (SME Initiative) Emeka Okafor's write up is good. I think this initiative is very important. But there's something a bit tangential that interests me quite a lot. Google.org famously did not incorporate and a not-for-profit. I saw Larry Brilliant on PBS News Hour and he rather demurred about the idea that Google.org purpose is profits. How to add a social purpose to institutions, how to move towards corporations with a triple bottom line, is a new territory and philosophy.

One of the key problems is how to trust something new. Trust is of course something tested not given all at once. The development of LiA is in some ways the story of the development of institutional trust.

When we imagine say the development of housing that isn't based on a mortgage model, but on a slow growth model, trust seems the essential element.

I certainly agree with Christina that placing a savings requirement up front seems a tall order, an impossible requirement. Linda has made the point over and over that debt isn't necessarily a good thing. Nevertheless finding ways for people to collectively accumulate wealth seems essential. Credit and savings seem to me two sides of the same coin.

Attention to micro-credit at least provides a way for many to re-think the ideas of credit. I think that similar attention to re-thinking savings is in order. It's a good time to be imaginative.

I've found Grameen's financial model interesting. Therefore wanted to address the comment around the 50% interest rate.

In reviewing Grameen's 2006 audited financials, the income they derived from their current $500M of loan portfolio is $100M. Simple math would suggest an average interest rate of 20%.

Note the numbers are approximate and rounded. I've seen numbers in the 20%-30% range and 20% seems to work for Grameen. Specifically:

From their $100M interest income, they paid back $50M as interest to deposit holders (Grameen members who maintain bank accounts across 2,500 branches), while another $40M is the cost of doing business (salaries, rent, taxes, utilities etc.) Which leaves some modest profit to address any unknown variability on the cost side, re-invest for further expansion (e.g. new branches to cover more villages) AND pay a dividend to the owners (made up of the poor borrowers and deposit holders).

Overall, Grameen's financials are fairly transparent. And seems to be based on a reasonable business model to help meet their social objectives.

I was looking for something else and happened upon this program. There is no recent information on the site reporting progress. Does anyone else know anything about its progress?

I don't know about the progress, but am curious. One aspect of the plan I'm particularly interested in is loans for cell phones so that the beggars can provide a roving service. Most of the links I tried were dead but this one in PDF gives the basic press story of that aspect of the program (scroll down).

A liberal blog called Firedoglake has book salons with authors. These salons almost never work. There are bunches of people wanting the author to answer their questions in a short hour. I'm odd, I know, but I do enjoy these forums mostly for the questions people are asking. Here's Muhammad Yunus there. I've got to hand it to Yunus for really engaging in the fray. He responded to questions about social business models, for example:

Challenge to soc bus is to show alternative products, services leading to sustainable lifestyle. If we put our mind into it we can find them, popularise them. People are willing to have a life style which is sustainable, if they are presented with them. But PMBs keep driving them in the other direction by continuous skillful attractive campaigns. It is time that we give people sustainable options through SBs.

And...

No fault of the people. People are as much greedy as they are generous asacrificing. But the theory never allowed the sacricifing part of human being show up in businesss. So all we get in business is the greedy part of people. Theory must be be corrected and let the other part of people particiapate in the business world. Then we can see the real people in action. You are not greedy, I am not greedy, Iam sure others like us too. Theory has forced us all to adopt this only role that is of being greedy.

I'll admit that my taste in Web content is odd, but I think scrolling through the discussion is worthwhile if anyone is interested.

Finally, this page at Global Urban Development Magazine has a piece about the program written by Yunus--scroll down to "Grameen Bank Struggling Member Program"

Also on that page Linda you might be interested to read the Microcredit Summit Campaign survey methodology at that page.

[Deleted by author on 01 Feb 2008 07:15 PST: duplicate]

Working to develop something new from our community based microlending and loan guarantee experiences to date, I find myself back at an old pet idea of mine to develop a rating system for micro-borrowers.

I've developed a draft plan for doing that within the next 1-2 years, that the CBOs have been reviewing and will be getting ready to roll toward when I return to Uganda in March (I'll be leaving in a few days). Thought y'all might be interest to see the direction we're likely to be headed in. Comments welcome. Sorry for any format challenges - this is an excel document converted to html: http://lifeinafrica.com/programs /microsuccess.htm

http://timbuktuchronicles.blogsp ot.com/ thanks great blog

is there a simple way to search for similar blogs

>>is there a simple way to search for similar blogs<<

Download the Google Toolbar, then when on any site where you want to see others like it...click the "similar pages" in the toolbar.

where in the toolbar are you talking about - eg I go to above blog http://timbuktuchronicles.blogsp ot.com/ ; I look at my google toolbar - it has 3 broad menus: features, buttons, more but I cant find something that shows me similar blogs

Chris, if I put your url in google it shows one result.

Right under that result I see this line:

timbuktuchronicles.blogspot.com/ - 193k - Cached - Similar pages - Note this

click on similar pages

It brings up another 28 pages

THANKS SO i GET THIS?/ wonder what the similar algorithm is as its not what I would have called very similar

Free weblog publishing tool from Google, for sharing text, photos and video. www.blogger.com/ - 15k - 3 hours ago - Cached - Similar pages - Note this

PSD Blog - World Bank GroupRegions. Africa · East Asia and Pacific · Eastern Europe and Central Asia · Latin America · Middle East and North Africa · South Asia ... psdblog.worldbank.org/ - 98k - Cached - Similar pages - Note this

DIGITAL AFRICA: AFRICA IS BORN IN MEDigital Citizen Indaba (where I will deliver the keynote) and Highway Africa coming up in South Africa. See you there! ... digitalafrica.blogspot.com/ - 81k - Cached - Similar pages - Note this

The Zimbabwean PunditPolitics of change and change of politics: Zim elections '08. I finally got the chance to put down my views on recent developments in post for Pajamas Media ... zimpundit.blogspot.com/ - 54k - Cached - Similar pages - Note this

Atanu Dey on India’s Development —Recent Comments. pankaj on The Numbers in Pictures · Notsure on Boston in the Spring Time · Notsure on Food prices · Notsure on The Numbers in Pictures ... www.deeshaa.org/ - 79k - Cached - Similar pages - Note this

NextBillion.net - Development Through Enterprise | Eradicating ...Thank you for coming to NextBillion.net. Our goal is to identify and discuss sustainable business models that address the needs of the world's poorest ... www.nextbillion.net/ - 94k - Cached - Similar pages - Note this

Africa UnchainedAfrica Unchained. A platform for analysing and contributing to the issues and solutions raised by George Ayittey's latest book 'Africa Unchained'. ... africaunchained.blogspot.com/ - 153k - 20 hours ago - Cached - Similar pages - Note this

WorldChangingAn online magazine covering tools, models, and ideas for building a better future. www.worldchanging.com/ - 52k - 4 hours ago - Cached - Similar pages - Note this

WordPress › Blog Tool and Weblog PlatformA semantic personal publishing platform with a focus on aesthetics, web standards, and usability. wordpress.org/ - 8k - Cached - Similar pages - Note this

ethiopunditWeblog of eclectic Ethiopian and Ethio-American commentary. ethiopundit.blogspot.com/ - 212k - Cached - Similar pages - Note this

for example I would suggest this is a neighbouring blog http://rmsanden.blogspot.com/ to http://timbuktuchronicles.blogsp ot.com/

or http://povertynewsblog.blogspot. com/

this blog uses quite an interesting criteria though I am not sure how it chose where to divide the line

Due to free press concerns Poverty News Blog does not post stories that come from News organizations that are from the following countries... Pakistan Equatorial Guinea Syria Libya Sri Lanka Iraq Palestinian Territories Somalia Uzbekistan Laos Vietnam China Burma Cuba Iran Turkmenistan North Korea Eritrea There are many stories from Pakistan that were posted before we decided to add them to this list.

http://microcredit.bd.googlepage s.com/

I have seen excellent analysis of Micro credit, Grameen bank and its future. One quote: Doug Henwood " It's no surprise that micro credit has become so fashionable over the decade or two. In a time when the public sector is scorned and the freedom most highly valued in elite discourse is freedom of trade, lending the poor little bits of cash to become micro entrepreneurs is the stuff of Noble-prize-winning `peace effort'. and when...." Contributors of that page are: Patrick Bond Farooque Chowdhury Bosse Kramsjo Robert Pollin Susan F. Feiner and Durcilla K. Barker Gina Neff Anu Muhammad Badruddin Umar Omar Tareq Chowdhury

Hello:)

I was wondering: Why, do you think, does the author of The Magic of Microcredit think that empowering the poor is a more modest achievement than a solution to poverty? In my novice opinion, from the evidence in the article, microcredit does seem to work but (my gut instinct here) it's the empowerment that really counts . It must be relatively easy to slip back into poverty, compared to losing the sense of empowerment gained in climbing out of it- anyone agree ?

Ceris let me jot down something from the mouth of muhammad yunus-on one of the 4 times I have briefly met him in 2008's first half year of Future Capitalism -as best I recall it and you decide who agrees
 

Microcredit (and I imagine any economics tool worthy of human beings integrating our lifetimes around) is an intergenerational system designed to sustain 3 sub-games in one

Game 2 the middle one is to bank for the poor- to help each person know that time in their life they most need credit to start income generating activity, and to be co-mentored by 5 female companions on the same journey in the same community

Game 1 (ending poverty as failed community system) what comes before the banking is to work out what is crashing all around the community- what is putting it into ever more poverty- and to find some way of turning that round, as well as inviting the whole community to envision that compound future possibility (in Grameen's original Bangladesh context 16 agreements)

just to give 2 concrete examples around wholeplanet - in bangladesh where the poor have always repaid loans at 98%+ (higher than any banking system anywhere) one first thing to turn round was discrimination against women, many of whom in 1970 were treated more like animals than men treated themselves (albeit because 90% of economic survival appeared to involve heavy labour work); in contrast in kenya today, the leading microcredit org's first problem was completely different- the poor were actually defaulting on their loans but this was because they suddenly found someone in their extended family needed hiv drugs or some other expensive life-saving medicine and gave their money to this instead of using it to develop their microbusiness- so in this case there was no purpose in offering microcredit without microhealth insurance (miraculously in kenya a lot of misisonary hospitals were on verge of going bust so the microbank found it could do annual health insurance for whole families at $10 per family if it made an order for hundreds of thousands of community customers)

Game 3 In most bottom billion places there is another crisis apart from Game 1's what is viciously spinning ever more communal destruction (discrimination in 70s bangladesh, hiv in kenya). It is that historically a disaster of some sort has happened every half generation or so - in bangladesh this is floods. So in the view of Dr Yunus microcredit must be designed not just to take a family past the poverty line but the whole community so far ahead that even if disaster strikes, communities and generations will look after each other and not slip back behind the poverty line. In Grameen's case everyone who takes out a loan is asked to commit as far as they possibly can to keep their children at school and if the grameen branch they belong to fails to continue to achieve this goal it loses its star rating just as a hotel might lose its star rating if food poisoned folk

So its quite easy to walk into an operation in Africa or any world village that says it is offering a community microcredit and see if it is built to last 15 years around all 3 of these objectives. If all it shows you is its last quarter success numbers leave the community or suggest residents run on the bank! Whether americans will learn to do the same thing with every and any institution caught up in subprime is of course a freedom of choice.

chris macrae washington dc 301 881 1655 bureaus for http://saintjames.tv/ http://futuresunited.com/ http://journalistsforhumanity.com/ http://africaplusplus.com/

Thank you Chris, that's given me a really good picture, I've read up a little on Grameen and Dr Yunnus but this is the first time I've seen the 3 "games" approach - I like it, it makes a lot of sense to me.

One reason I like it is because I can use it when I think of the kind of community I live in, like this -

Game 1 is things like transport, education, interaction, the infrastructure of the community

Game 2 is the poor in opportunity and quality of life, it's initiating, facilitating, and engaging in opportunities

Game 3 is committing to maintaining the living community, in the sense in which a community is an organic whole, in all practical ways.

Put all three together, you get threefold empowerment - individual, community, and individual as part of the community. At least that's what just flashed into my head :)

I think like Dr Yunnus.

:)

ceris, yes great flow- thanks