Financial Times: Conflicts of interest (If you have trouble accessing the article try clicking through at the post at the Marginal Revolution.)
Bob Annibale's corner office, high up in one of London's few real skyscrapers, overlooks the Thames and the Millennium Dome from one window, Greenwich Park and the Royal Observatory from another. It is the kind of enviable perch you'd expect Citigroup's senior treasury risk manager to enjoy. But that is the job Annibale left three years ago; now he is Citi's "global director of microfinance".
Microfinance, the system of providing tiny loans and savings accounts to the poor, seems an unlikely and somewhat ironic candidate for Citigroup's attention. It was because banks weren't interested in serving the poor that the pioneers of microfinance saw a gap to be filled, back in the 1970s....
... Karlan and Zinman wanted to know what value there might be in expanding access to credit. ZaFinCo was no dewy-eyed social business, but a hard-nosed, profit-minded company, charging 11.75 per cent per month on a four-month loan, or 200 per cent APR, much more than Compartamos was generally judged to have been charging.
Despite the high rates, the results were astonishing. "We expected to see some good effects and some bad," explained Karlan, who checked in with the experiment's participants six to 12 months after they had filed their initial loan applications. "But we basically only saw good effects."
Most strikingly, those "treated" by the experiment - that is, those for whom the computer requested a second chance at a loan - were much more likely to have kept their jobs than the control group. They were also much less likely to have dropped below the poverty line or to have gone hungry. All these outcomes were recorded well after the loan had been taken out and (usually) repaid, so this was not measuring a temporary debt-funded binge.
This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment? ...
Microfinance, the system of providing tiny loans and savings accounts to the poor, seems an unlikely and somewhat ironic candidate for Citigroup's attention. It was because banks weren't interested in serving the poor that the pioneers of microfinance saw a gap to be filled, back in the 1970s....
... Karlan and Zinman wanted to know what value there might be in expanding access to credit. ZaFinCo was no dewy-eyed social business, but a hard-nosed, profit-minded company, charging 11.75 per cent per month on a four-month loan, or 200 per cent APR, much more than Compartamos was generally judged to have been charging.
Despite the high rates, the results were astonishing. "We expected to see some good effects and some bad," explained Karlan, who checked in with the experiment's participants six to 12 months after they had filed their initial loan applications. "But we basically only saw good effects."
Most strikingly, those "treated" by the experiment - that is, those for whom the computer requested a second chance at a loan - were much more likely to have kept their jobs than the control group. They were also much less likely to have dropped below the poverty line or to have gone hungry. All these outcomes were recorded well after the loan had been taken out and (usually) repaid, so this was not measuring a temporary debt-funded binge.
This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment? ...
Like the comments made on the original article, this kind of abusive interest rate is NOT the norm in microcredit lending. Generally rates are consistent with local bank rates in the country of interest. In my experiences in Bangladesh with microcredit the rates were closer to 11% ANNUALLY not monthly.
Posted by: Danny Gamache | Dec 08, 2008 at 08:09 AM
Agreed. I think the larger point is that inaccessibility of capital is so critical in so many contexts that even at astronomical rates lending has a positive affect.
Posted by: Michael W. Kruse | Dec 08, 2008 at 10:00 AM