In poor countries, or let’s say economies, proper financial institutions and banks do not exit. Or they do sometimes, but are not playing an effective role in the markets. Otherwise, would poor economies stay poor? Such an argument can be proven right or wrong, on case to case basis. However, most of us will agree that banks are important in smoothing the transfer of money from those who own it to those who don’t but can manage to make small payments towards the settlement of the amount and its embedded interest. Because of such an absence, even if it was in the effectiveness rather than actual presence, micro-finance was always controversial in how it can be used to help these economies and push them up the pyramid, even if very slowly. The controversy here is not a new one neither is the thought of it and its supporting systems that need to be in place for it to work, the issue was and still is in how to make the systems designed to financially serve these economies, work in the long run. That is, how to make the poor pay back, regularly.
Financially speaking, time is a key concept and regularity is also key. I will lend you whatever amount that you may require, perhaps, but I would want that money back with the right interest or profit -based on the banking system you accept- and the payments made in time for me to be able to predict my cash inflows hence manage my cash outflows. In the poor economies mentioned above, micro-finance is exploited mostly by illegal, though organized, institutions that I shall call institutions in their own environments. These, run by people who got high cash reserves, lend small to medium amounts with interest rates that range between 50% and 200%. When loans can be as low as 300 US Dollars or what is equivalent to that in the local currency, the amount seems to be not much if taken out of context. Though here, they should be kept exactly where they are. Poor economies, thrived if I may say by the poor, the poorer, and the poorest; can include incomes of 99 cents a day which would sound absurd and untrue to many of us.
The matter of fact is that it is true. And as they struggle to make enough money to cover daily expenses, shark loans come in handy whenever a huge expense like sudden serious illness becomes an inescapable reality for someone who hasn’t been spending on medical care neither does have a health insurance. Unlike other loans, shark loans have to be paid somehow. People who charge interest rates as high as 200% are capable of doing anything as they financially govern these economies, and so borrowers are better off committing suicide than defaulting on a shark loan. So what can be done to shift micro-finance into a favorable direction? To govern the financial sector, you need to ensure that people are committed towards paying back their loans no matter how small they are or otherwise banks will be running out of cash in no time and then going bankrupt. For that, culture is of great importance. Even when individuals were put in groups to make sure that each individual pays back, results were only slightly better.
The book, Poor Economics, includes more statistics than those mentioned above as well as what has already been tried. Repayment remains an issue in economies that are almost untapped in terms of banking where billions of US Dollars, or equivalent in any currency that you can trust nowadays, can be made out of interests on these tiny little loans in addition to an economic surplus of small businesses growing. Many did try, and one of them has actually won the Noble Prize for his Bank of the Poor project, but many other trials failed or were deemed to fail because of high default rates. And if you think about it, just like is the case with any system put into action, control is essential to guarantee its efficiency in achieving what it is meant for it to achieve. For that, perhaps a closer attention should be paid to what are these loans spent on or maybe the income and expenses of poor families should be regulated. Though the latter will increase operational costs on the little profit made per loan and might make it not worth the investment, yet.