Recently I read a blog on NPR’s Planet Money. I find that most debates on the topic mix up three very different questions:
1. Can credit help raise people out of poverty?
Someone recently said that if this was true, Bangladesh and much of Latam (where credit movements started in the 70s) should be poverty-free already. Though this may be an oversimplification, it does get to the heart of the matter. Classical concepts on usefulness of credit come from fundamental theories of economics, where credit is basically a tool to convert fixed assets into employable capital (think getting credit against land) or for investing/spending upfront against future income. For the poor, neither of these apply. Despite claims to the contrary, studies show that the vast majority of microcredit goes towards household needs, with less than a quarter (if that) going towards “micro-enterprises”.
2. Even if credit can raise people out of poverty, can it do so in the absence of supporting ecosystems and systemic interventions?
Even for the portion of loans that are made for income generation, businesses don’t happen in a vacuum. You needs support structures (besides just the loan) and business skills to make a business succeed, no matter how small the business. You need at least enough numeracy to keep accounts, to know how much money you’ve made (or not). You need enough people skills to attract and retain customers, to plan ahead, etc. etc. And not everyone is good at business – one only has to look at the failure rates of startups anywhere in the developed world to realize that creating a successful business is not easy, and it is made particularly difficult if you have to struggle for basic necessities of life as well.
3. Should credit companies catering to the poor limit their profit-seeking behavior, or act like any just other business?
The answer to this depends on your point of view about life, economics and ethics. Although the majority of recent debates have focused on this, to me it seems an irrelevant question unless we’re convinced of the first two.