Do the Micro!

8 Jun

Heading towards the end of my blogging-“career”, I looked at my previous posts and skimmed them quickly. Which were the good ones? The passionate ones? Those who I am “proud” of? Blogging made me realize that there is a general field that really is able to please and outrage me at the same time, (international) politics. Things that made me WANT to write about. At the same time, I also figured that I have neglected one important topic of my studies: business.
Actually business and politics do have a lot in common, but combining it with IT aspects? That’s a tough one. I talked to friends about it and suddenly it fell like scales from my eyes : Microcredits.

Well, I don’t want to explain you in detail how microcredits work and how they were created, probably you already heard and read about it (and if not, I’ll let Wikipedia to the job here). I’d rather raise the question wether and how micro credits are working now, after they have been active for several years? Micro financing was the answer to the problems in third world countries, after people realized that donating money would not solve the problems in these countries. The idea of micro credits (espacially to women) by building up own businesses and helping people to help themselves,  turned out to be a very promising matter in development aid ,espacially in the long-term.

Searching through the web, I found an article on microcredits “Tiny Loans Have Big Impact on the Poor” from The New York Times that reported on Mr. Khosla  who is “a partner at Kleiner Perkins Caulfield & Byers, a venture capital business, and a co-founder of Sun Microsystems (…) (who) would start working part time at his company to spend more time with his family and on his passion: supporting microcredit initiatives for impoverished regions”. He would go and listen to the stories of the women telling how the tiny loans they had received from a microfinance program had helped them to start home-grown businesses, transformed their poverty-striken lives and made better education possible for their children. Mr.Khosla being on of the few “goody two-shoes”.

After reading the article, I thought : Wow. What an amazing thing to do. But maybe to good to be true? I realized that the article was written in 2004, like several others that were praising micro financing. Being pessimistic as always, I thought let’s see what happened to micro financing in the last 7 years, is it still as altruistic as it seemed to be? (And I really whished that this time the human capitalistic tendency would not take effect.)

Using our beloved google blog search I found many current articles on “Cambodia’s Micro-credit Trap”  about people , here in particular Ek Sovannara, who had a business idea, borrowed money but happened to not be able to pay it back. Therefore he loaned money again from private lenders and trapped into the circle of debt. But still, this example was considered to not be representative because “only licensed microfinance institutions are obliged to report on loan defaults, while smaller, registered institutions do not”. So, two problems were briefly mentioned here, a) the need to evaluate the business plans of borrowers more properly and b) the private lenders.

I decided that the problem of the private lenders was worthy to dig in deeper and after searching the web again, I found one article that really hit the bullseye. “Have You Gotten Rich Yet as a Microlender?” by Mark Engler reflects the basic story of micro finance and also points out the problems, in particular one: “If you loan the poor money with little expectation of profit, you’re probably running a legitimate anti-poverty program. On the other hand, if you turn microcredit into a business in which shareholders expect to maximize return, your interest rates will start to creep up. At that point, you might be a shade better than the black-market loan sharks, but you are still practicing usury.”
He also proves his point by listing several articles in The New York Times that shows the “movement’s evolution”:

-“Tiny Loans Have Big Impact on Poor” (from 2004)

-“Peace Prize to Pioneer of Loans to Poor No Bank Would Touch” (from 2006)

-“Some Fear Profit Motive to Trump Poverty Efforts in Microfinance” (from 2009)

-“Banks Making Big Profits From Tiny Loans” (from 2010)
How did I feel after proving my pessimistic point? Not good. Do I now think that micro financing is pointless? Not at all.
In my opinion it is still one of the most promising projects in development aid. The only thing we should consider, espacially as soon-to-be managers,  is that even the best und most unselfish business projects attract capitalistic sharks that are only thinking of their own profits. There is no free lunch…


One Response to “Do the Micro!”

  1. arinanira June 12, 2011 at 9:36 am #

    What a thoughtful and well researched post! I really enjoyed reading it.

    After reading about M. Yunus Nobel Peace Price in 2006, I have not heard much about microcredits. Well I have not payed much attention to them anyways, since I put the information about them somewhere into my brain’s division labeled ‘finance (harmless)’. Your pessimism encouraged me to enquestion my own perception of this institution. After split seconds Google gave me a link to a Danish documentary critizising the very Mr Yunus and his company for pushing people into micro debt! These devils in disguise!

    It’s important to stay critical towards loans. Especially when there is such a massive one-sided PR behind them. Thanks for teaching this lesson, by pointing out the broad nature of microcredits.
    Good job!

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