Microfinance: Maybe it wasn't such a hot idea after all

Too much microfinance may be a really bad idea.

Microfinance has been a big social experiment. The general idea: You lend small amounts of money to residents of poor countries. They start up businesses and lift themselves out of poverty.

Now the Wall Street Journal reports the downside of microfinance:

Today in India, some poor neighborhoods are being "carpet-bombed" with loans, says Rajalaxmi Kamath, a researcher at the Indian Institute of Management Bangalore who studies the issue. In India, microloans outstanding grew 72% in the year ended March 31, 2008, totaling $1.24 billion, according to Sa-Dhan, an industry association in New Delhi.

Yes folks, the same credit bubble that has sidelined the U.S. consumer is now a problem in shantytowns.

Learn more: Sa-Dhan's microfinance map; Financial Inclusion – A View from Below (pdf); Ramanagaram Financial Diaries: Loan repayments and cash patterns of the urban slums; Wikipedia on microfinance; and Knowledge@Wharton: Microfinance grows up.

The Journal has good amount of on-the-ground reporting, but the larger question remains: Is microfinance a good idea? Like all credit, it's a great idea if used properly. The problem is that folks were buying things they wouldn't have otherwise. The credit was used for goods not businesses or services.

However, it sounds like microfinance is a toxic brew as currently constructed. There are venture capital firms, big banking institutions and microfinance funds looking for a place to hide in the economic downturn. The common thread: Microfinance has to generate returns. There may be some good to come from microfinance, but many players are just following the money and poor folks are getting a hard lesson about credit.

This post was originally published on Smartplanet.com


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