small-scale capitalism

[erf_]

There's been a lot of buzz about online microfinance lately, especially Kiva--maybe the trendiest form of philanthropy I've seen on the web since The Hunger Site and FreeRice. I have some thoughts on the matter.

Comments

[starburst8213]

Man, I'll happily consider any argument that successfully quotes both Shakespeare and the Bible :) Nice work!

[aesvir]

There's also been some criticism of microfinance that it produces a lot of rickshaw and coconut owners, but not the type of infrastructure that can, say, take Taiwan out of an agricultural society and into semiconductor manufacturing. I'm not an econ person, but I think the main point is that microfinance can raise the standard of living for someone in Bangladesh, but not do much for someone who wants to reach the standard of living in Korea. Which is not to say that microfinance won't be a crucial part of any poor nation's transition.

If you're worried about usury, aren't there Islamic financial institutions that avoid charging interest (by charging fees?) and the like. I don't know how you can make sure your donation to an Islamic charity won't go into purely religious uses, but the non-usury idea sounds interesting.

[erf_]

That's not a particularly strong argument--it's like saying a country shouldn't invest in bullets because tanks are impervious to them. Microfinance isn't a panacea, and it certainly isn't intended (or appropriate) to singlehandedly spark a Taiwan-style economic miracle in a developing country. Its role is to get the rickshaw and coconut industry up and running so that there will eventually be enough infrastructure, capital, tax revenue, etc. for the country to move on to manufacturing, electronics, and the like. Those efforts are best served by existing mechanisms like the IMF and government subsidies. But you can't build a semiconductor factory in a country that doesn't even have enough money (or incentive) to fix its roads, much less deliver industrial levels of electricity or set up high-speed internet. It's intended to be part of the solution to world poverty, not the solution itself

[aesvir]

Actually, I was writing of South Korea, as in a country may need microfinance style development to climb up from Bangladesh levels of standard of living, but will need concerted investment in infrastructure to reach that of S. Korea.

As you already noted, the problem with microfinance is that you still have high transaction costs, and hence high interest rates. Some availability of capital is better than no availability, but donors need to look more into the mechanics of the charities rather than focus on the feel-good aspect.

[erf_]

I asked my boss about this today--he's been in the financial services industry for ages, and is quite knowledgable about such things--and he mostly agrees, but added that transaction costs aren't the only thing that keeps interest rates so high. Commercial banks keep their money liquid by borrowing when they're short, either from the government or from other banks. If the entire point of your project is to provide loans to an area with no other banks, and your bank is funded solely by small private donations, you don't really have that option. Every loan that doesn't get paid back is a massive kick to the balls. Since interest rates are tied to risk, this means microfinance banks are considered a higher-risk investment even though borrowers rarely default, and therefore have to pay higher fees to get the rest of money-land to play with them. There are silly games you can play to reduce this risk, like putting money into groups of entrepreneurs as a single investment and creating hedge funds and such, but that is exactly what Wall