I have returned from a two-week vacation around Guatemala with my friends. I hope to get some pictures up of the escapade sometime later this week. I am still getting back into the swing of things around these parts, but I thought I’d leave you with some thoughts of Eirk, an Econ major at Michigan who knows much more about economics than me. He has some thoughts about microfinance and Kiva in response to the discussion on the blog.
I have a few ideas about how you may be able to assuage your reservations about whether microfinance is truly helping to alleviate poverty. Firstly, there are indeed many measurable ways to assess the impact of micro loans. In my favorite econ course at michigan (development economics) we talked at length about the positive impact on health, education, and community well-being which can be seen in studies of microfinance.
To help your readers better understand why micro finance is so important (and indeed why interest rates of 30 or 50% are not as bad as they sound in the developed world), it may be helpful to give a brief overview of this basic econ principal. The lack of available loans to poor entrepreneurs is something that flies in the face of conventional economic wisdom. Those with little access to capital have much much more to gain by receiving a small loan. (The return to an investment is likely very high) Econ theory says that capital should naturally flow to those individuals who have the most use for it. Unfortunately, the risk is often too great for a bank or Microfinance institution to make the loan. By aggregating loans from many lenders (which kivas website does) or lending to groups of entrepreneurs instead of individuals, the risk is mitigated. You, along with the loan officers of FAPE, are the crucial link that makes the transaction possible. Microfinance is a relatively new concept. Kiva has developed a loan process that produces unheard of repayment rates in areas which were previously thought of as impossible to make loans. As the process gains credibility, the interest rates payed by entrepreneurs will go down.
As you struggle to see the positive impact you are making, remember that you are experiencing things on an incredibly small scale. The true value of your work is yet to be seen as the slow mechanisms of a globalizing economy adapt to incorporate the process you are helping to develop.
Erik adeptly points out the niche that microfinance and Kiva fill. They pick up where banks fail, providing a useful service to those who do not have many options. It’s always important to remember the scope and breadth of microfinance. Kiva is not meant to do everything, just to fulfill a role for which there is a need. Erik is, as am I, hopeful about the long slow processes that will manifest themselves as a result of microfinace. In theory, health and well-being of those receiving loans should improve. Yet I have not seen evidence in the field, nor in any study to completely justify this theory. If someone does find it, I’d love to give my hopes some statistical backing.
Putlzer Prize winner Nikolas Kristof offers his thoughts on the matter, also stating the lack of evidence of long-term, positive outcomes.
