There’s an opinion piece in the Wall Street Journal (online.wsj.com) on the recent development of microloans and other economic stimulus to poor countries, in this case Mexico, which has caused some outcry among non-profits and so called “social innovators”. The apparently self-interested non-profits are claiming that these microlenders are earning too much profit providing loans to micro-entrepeneurs.
In his “reflections” on “microfinance interest rates and profits,” Mr. Rosenberg writes that “overcharg[ing]” clients under a nonprofit model is OK because it is done for the sake of future borrowers. But when profits go to providers of capital through dividends, then there is a “conflict between the welfare of clients and the welfare of investors.” It’s not the commercialization of the lending, we’re told, but the “size” of the profits that must be scrutinized.
What seems to elude Mr. Rosenberg is the fact that there is no way for him to know whether there is “overcharg[ing]” or by how much. That information can be delivered only by the market, when innovative new entrants see they can provide services at a better price. This has been happening since for-profit microfinance began to emerge, and the result has been greater competition. Rates have been coming down even as the demand for and availability of services have gone up.
Now, no one wants lenders to take advantage, and I don’t believe they are, but from where I sit a little capitalism is just what is needed in these areas and as more lending takes place, and more businesses rise, the miracle of the free market will level and lower any issues there might be, while the tide lifts all dinghies in this case. In the mean time, money is being pumped into places that desperately need it and into pockets that never would have access otherwise. Read the article and decide for yourself. Being a microlender myself, I’m encouraged by what I’ve seen.