Speaker 1: Development Economics using Micro Finance
We spoke with a development economist who deals with micro financing to improve the many slums in Egypt.
She told us how they formed teams in local (normally tight nit areas and how this led to a very low default rate (below 1%). These teams of woman helped each other out and all were pushed to make their installment payments on the micro loan because they would be hurting the group my defaulting and would lose respect in the community. It is getting late so I will be brief.
These micro finance operations are considered by many to be charity. However, their small amounts and high interest rates (40%) reminded me of Payday loans in America, who hold a generally negative connotation. The only differences are that these are given to those without any employment (mostly woman) to start small operations out of their house. the amount starts small but increases as the group of woman pay back their original amount. (they have to "pass" the first level to progress to the second).
The second this that the lender works with the woman to build up their operation slowly with the intention of one day making a legal legitimate business.
I observed that highly saturated areas may star to form micro-economies. I am unsure if this helps the area in the long run by bringing in money from outside the micro-economy, or if no new money is brought into the micro-economy but money leaves through the interest payments. I will have to think about it when I am more alert. Good night.
40% interest enslaves people. It does not provide much economic growth IMO.
ReplyDeleteWe had the same speaker our first day.
ReplyDeleteUnlike payday loans here, where people want a quick advance, the money that the women borrow multiplies, even with a 40% interest (which I agree, is absurd) if they buy livestock, it's a good investment. Also, since the loan goes to a group of people, rather than just one individual, it's a safer bet for them.
USAID/Egypt alone has totaled around 2.5 billion in microloans. and there's less than a 2 percent default rate which is wonderful.
With the loan to a group of people and is used to buy livestock, the risk is reduced making the 40% even more absurd. Oh well, if it works.
ReplyDeleteThe reason the loan is 40% is because of the high operating cost. The variable costs gets more expensive as the loan amount decreases. Managing one $10,000 is easier than a hundred $100 loans. I agree the interest rate is astronomical, but with a default risk premium of essentially zero, i'm not sure what else they can do, but cut service (costs) which is the whole reason they are successful.
ReplyDeleteI would need to know more about the program to offer anything intelligent. Nevertheless, the problem may be the legal standing of the borrowers. Let's say a group of women in a village want to make a loan and form a cooperative. Then, the cooperative (assuming something like that exists in Egyptian law)could be responsible for a larger loan, that helps for people at a lower interest rate.
ReplyDeleteThus, the issue may involve the legal property rights and other rights in Egypt are not amenable for reducing the risk of the lender. So, to make the process work better and to allow for more economic development, then the government needs to look at the concerns of the lenders and see what property right can be established to reduce the lender concerns.
Isn't it about time for a new posting? Ian, where are you?
ReplyDeleteI just posted. We do so much I cannot post about everything I do. I am still in Giza We leave for the desert tomato. We will not have any internet so I will not be posting for a few days. I love you.
ReplyDeleteJust curious, who is this desert tomato and does Nickie know about her? :-)
ReplyDeletehahaha Ian I can't wait to meet your dad… us persians don't turn into tomatoes in the desert, this girl must be super pale.
ReplyDelete