Wednesday, June 23, 2010

MicroFinance and Social change

While the jury is out on if free markets are rational, one can be certain that in developing countries free markets, if it existed, are not only irrational, but also very prejudiced.

For those of you who have seen women selling vegetables in a bamboo basket, you know the difficult life vendors lead in developing countries. They are skilled traders and work very hard, but they could never escape the poverty. Let’s look at a case-study of a vegetable vendor. Typically they buy produce at 3am and sell it on the streets by 10am. The capital is Rs.300 and the sale on a good day is Rs.500. That is a profit of Rs.200 which is about Rs.6000 or $120 in monthly income, but only if the vendor had 30 good days in a row. There are bad days during monsoon when it is hard to sell vegetables on the street, there are days when the vendor is sick or there is a riot or a strike. Rs.6000 is barely enough to maintain a family of 4 and there is always debt piled up from a sickness or an injury. It is really hard to access capital with a good business case, and for a vendor with debt already piled up and a high risk business selling perishable good with little infrastructure, the odds are stacked up high against them. That’s where the infamous daily lenders come in. Dubbed 'kandhu vaddi' the lenders target the poor and the destitute and lend them as little as Rs300 in the morning and collect Rs.360 at the end of the day. For the poor fruit vendor or the samosa vendor the day starts with borrowing from the kandhu lender. For the vendor, its not really bad. The poor cannot go to a bank and borrow money for business and their only source of capital is on the streets. Even after paying a whopping 10% interest on a day, they walk away with a profit which can put food on the table. The problem is when the vendor has a bad day or is unable to make a profit, the unscrupulous lenders often harass the borrowers and try to recoup the money in ways that can neither be described as legal nor ethical. The interest owed is added to the capital and that accrues interest on a daily basis and the hole gets deeper and deeper.

What microfinance does is to lend money to the ingenious vendors and business people in poor countries and give them a chance at success. Muhammad Ynuis bagged the Nobel peace price for his work in microcredit through Grameen Bank. Microfinance is an established industry in several developing countries, however because of their for-profit business model, the institutions really ignore the needy with no assets. The costs of operations is high, it takes a person on the ground to verify the validity of an applicant and his business to be able to grant a loan. The labour for the business case validation often is as much as the loan requested. Microcredit is best done by social entrepreneur, where the goal should be social change and not profits.

If you are interested, there are several online Microcredit peer-peer lending sites you can participate in and make a difference.
1. Rang De
2. Kiva
3. Optinnow

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