Microlending is still booming, should we embrace it?

The microcredit business has not taken its foot off the gas, especially in LatAm, which has become a hotspot for microloan activity. Last year, the Inter-American Development Bank (IDB) recorded that in the whole region of Latin America and the Caribbean there are 22 million microcredit customers, and their portfolio exceeds $40 billion USD.

The numbers for the region are outstanding. There are 1,061 institutionalized lenders, and from 2012 until the present year, they have grown their customer base by 69%, and they total worth of their portfolio by 48%.

This rise in popularity is no coincidence, microcredits have been pushed hard by international financial institutions such as the IDB and the CEPAL. These believe that microcredits are to work as the backbone of poverty reduction strategies, as access to credit is the best way to guarantee that poor people can construct businesses and integrate themselves into the regulated and formal economy.

An extensive report on the subject, issued by CEPAL and titled ‘Microfinanzas en países pequeños de América Latina: Bolivia, Ecuador y El Salvador’, or ‘Microfinancing in small Latin American Countries: Bolivia, Ecuador and El Salvador’, reported on the great benefits of microlending. For one, it states that 95% of microcredits are payed back in full, which sounds like something to cheer for, if it weren’t so controversial.

Microloans are always targeted at the poor, and more often than not, they are targeted towards women, this is because they aim to offer an alternative to people who cannot get finance through traditional financial institutions. The thing is, these people are rarely versed in entrepreneurship and business administration, so while their businesses take off, they often have to take a second job to make payments on the loan with which they were supposed to earn their independence.

When circumstances get dire, and their entrepreneurial project fails completely, people are known to get a new microloan with which to pay the first one, successfully burying them in debt with no way to pay it back.

The big problem with microlending is education then. Yes, people will often pay back their loans (although probably not at a 95% rate), but they do so at great cost to themselves.

These credits often go on low interest rates, of around 2% to 10% with a two-month grace period, which sounds great, but for this reason companies will often grant very small loans. If a customer wants to access a larger amount, then they have to recur to guarantors, which is often problematic as “many people doubt their acquaintances will repay large debts”, says Anup Kumar Singh, managing director of Sonata, a massive Indian microfinance institution.

It is worth taking a deeper look into microfinance as an institution, if it truly is the way that free market enthusiasts promote as a way out of poverty for millions then it must not backfire. The premise sounds hugely beneficial, as it incurs States into virtually no expense and promotes entrepreneurship and sound financial practices among the poorer spheres of society. However, if it is going to leave them worse off and drowning in debt, it must be reformed.

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