Microfinance Was Different before Capitalists Discovered It

In 2007, when my better half and I first met, she was doing microfinance law. I had heard of microfinance, but was only superficially familiar with it.

I think I knew that Muhammad Yunus won the Nobel Prize for it (the Peace prize, not for Economics) and how microloans work. I also understood that microlending violates a basic rule of banking: you must have collateral in order to give a loan. There has to be something you can take and sell if the borrower fails to repay.

Yunus didn't invent lending circles. They predate him, and have been known as cestas in Latin America and by many other names around the world. Yunus brought them attention, and for a while, that was terrific. Many of the world's poor got access to funds that helped them bootstrap out of their situations.

Counterintuitively, microloan default rates are lower than traditional loans. That may be because they were usually lending circles, not individuals. The members of each circle are highly motivated to help one another repay; that's how they get to use the funds, and how they improve their own credit record.

Then the major financial centers got wind of microfinance's successes, and eventually got enthusiastic. Money poured in. And as the money mounted, problems multiplied:

• The circles broke, and increasingly microloans went to individuals
• Countries couldn't track who had a loan, so individuals applied for many
• Some borrowers got in trouble
• Lenders learned that complementary training and services were important

Then some markets got saturated, with some borrowers taking multiple microloans, one to pay off the other, unable to close the loop. Some committed suicide.

Our current flavor of Capitalism doesn't like mutual aid. It doesn't like leaving anything on the table for others. It doesn't like equity, community or waiting especially long.

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