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Borrowing an idea from the global credit markets

Every now and then, the microfinance acts as a microcosm for the greater financial system. A while back, I wrote about how the global system will affect microfinance. Today, I came across a post at CGAP’s microfinance blog that was sort of an inverse. The post discussed the fact that despite increased access to microcredit, people still relied heavily on moneylenders for short-term financing — an occupation that microfinance was supposed to replace.

The post raises the issue of repayment flexibility as a the major reason why moneylenders continue to flourish, since they allow for borrowers to adapt their repayment schedules to their own income streams. MFIs often sacrifice such flexibility in exchange for scalability and predictability.

This trend is unsurprising to me, as the greater financial system has proven that one priority that is always valued highly is flexibility in repayment mechanisms. Much of the financial innovation that has been blamed for the most recent collapse can be attributed to borrowers constantly searching for novel ways to repay or recategorize debt. So it comes as little surprise that a similar behavior would exist at the BoP level.

The more important question here is the normative one — should moneylenders be eliminated and should we wait for market forces to do that?CGAP’s post suggests that without greater flexibility on the part of MFI’s repayment schedules, moneylenders are here to stay. But it is too early to say whether or not that is completely a bad thing.

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One Comment on “Borrowing an idea from the global credit markets”

  • 21 December, 2009, 11:10

    Vinay,
    its a great point on repayment.  Thought you would be interested in knowing about my project in Zambia.  I call it “rent-to-own” and basically its a mechanism for small entrepreneurs and farmers to obtain productive assets.  They choose their payment schedule, anywhere from 2 months up to 12 months.

    http://markhemsworth.blogspot.com/

    Would love to hear your thoughts.

    Mark

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