We heard from two speakers about their personal experiences working in the finance indutry with individuals afflicted by poverty. Suma Reddy shared her insights from working with SKS, a microfinance organization working with women in India, and Christophe Ringer contributed a domestic perpective from working in community development financing in Chicago.
First, in response to Prof. Foster’s comments about the willingness to loan money to someone being a ‘gift’, I very much agree that the act of engaging someone in commerce with a loan provides the borrower with a sense of esteem and self-worth that can be greater than the monetary value of the loan itself. But, in India’s microfinance markets, it doesn’t appear as if the lenders have chosen to legitimize individual borrowers, but rather they are recognizing and engaging in commerce with groups of women. Indeed, most of the microfinance organizations worldwide have chosen not to legitimize individuals with loans.
This raises the question of the value of the social fabric of the communities in which microfinance organizations choose to do business. In India, as in other areas where microfinance has been proven to work, the village model has allowed the poor to have access to financial capital specifically because of the fact that they have social capital.
But what about the American urban poor? Why has microfinance not taken hold here, or other programs similar to it in nature and intent? Do we have the social capital, the close-knit aspects of society that would allow lenders to make loans to Americans living in poverty in urban areas such as the South Side of Chicago or in North Nashville? Is it perhaps the economics of it don’t work, that there is not enough of an ROI to make it mutually beneficial for borrower and lender?
Feel free to respond with thoughts and comments, and pick apart my arguments. Let the blogging begin!
Ryan
by: Cyrus Dadabhoy
That’s a great piece and a pretty compelling question you’ve raised, Ryan. I can comment on why the microfinance model is successful in India. (I’m from Bombay).
In rural India and also among the urban poor, society has a very large impact on an individual. For example, if young women don’t get married by a certain age, they’ll probably be branded as “loose” or “immoral”. Hence there’s parental pressure on them to get married at a young age. So what I’m saying here is that when a poor woman in the village is given a loan of x amount, it’s the society, the peer pressure and especially the coercion that kick in and compel her to repay the loan.
I can’t comment on the dynamics of the urban poor in the US and why this model isn’t successful in areas like Chicago’s South Side. I’m guessing that one of the reasons is there’s really no or very little societal impact on individuals in the States. But, I’d love to hear others’ thoughts.
Keep the bloggin’ goin’!
Cyrus
by: Mark Becher
Great points by both Ryan and Cyrus. But, one aspect that can not be overlooked is the scaling difference between India and America. Microfinance makes a difference in India because they are able to loan relatively small amounts of money. Even though the loan amounts are small, they are able to significantly improve the life of the borrower. In America, the loan amount would need to be much greater to have the same impact. Things are just more expensive in the US. From the lenders point of view, they would need to make larger loans than in India with the same amount of risk. If it was me, I would choose to lend in India.
That said, I believe microfinance is a great idea and can have very positive effects. Hopefully someone will determine how to translate it to the US.