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Sunday, August 17, 2008

Microcredit and Payday Loans

I find it fascinating that 3rd world "microcredit" is a trendy thing these days (what with getting a Nobel prize, getting Natalie Portman as a spokeswoman, kiva.org getting a lot of press, etc.), whereas payday loans are evil -- maybe a necessary evil, but definitely something you'd want to avoid getting if there were alternatives.

Here's a pretty good article on microcredit:

"Most microcredit banks charge interest rates of 50 to 100 percent on an annualized basis (loans, typically, must be paid off within weeks or months). That’s not as scandalous as it ­sounds—­local moneylenders demand much higher rates. The puzzle is a matter of basic economics: How can people in new businesses growing at perhaps 20 percent annually afford to pay interest at rates as high as 100 ­percent?"

"...If borrowers are using microcredit for consumption and not only to improve a small business, how do they repay? ....Borrowers manage, at least in part, by relying on family members and friends to help out. In some cases, the help comes in the form of remittances from abroad. Remittances that cross national borders now total more than $300 billion yearly. A recent study in Tanzania found that microcredit borrowers get 34 percent of their income from friends and family, some of whom live abroad, but others of whom live in the city and have jobs in the formal sector."

These are just excerpts. The whole article points out that microcredit exists within, and enhances, a social and formal network. The formal network means they don't break your legs and this might be a person's introduction to the formal banking system. The social network part means there's social pressure to repay your loans -- and an expectation that relatives are going to help you out. The loan is likely to be used for necessities of some sort.