Does Microcredit Squeeze out the Moneylender?
by Richard Rosenberg: Wednesday, December 16, 2009
According to Grameen and others, microcredit should reduce poor people’s need to use moneylenders, who are widely (though perhaps not always correctly) regarded as exploiters. Microcredit is booming in India. But a December 15 article in the Wall Street Journal reports that the number of moneylenders is growing fast too.
I remember a conversation with Saurabh Sinha years ago in which he said that he and Imran Matin were finding that members of Grameen and other MFIs in several Bangladesh villages used moneylenders as often as non-members, or more often. That sounds counter-intuitive, until we remember that most microcredit requires a fixed weekly repayment schedule that probably doesn’t match up very well with the irregular income streams of many borrowers. It isn’t so surprising that they would occasionally go to a more expensive short-term loan from a moneylender in order to bridge a gap in repayment of a less expensive long-term loan. Businesses small and large do exactly the same thing all the time.
If that’s all that’s happening, it’s not so worrisome. But what if the ever-increasing loan sizes get borrowers in over their heads, so they can’t ever retire the total of their debts? The ability to “cross-finance” back and forth between the MFI and the moneylender, repeatedly borrowing from one to repay the other, can hide the problem, temporarily at least. If a lot of borrowers are doing this, the MFI’s repayment rate can look great for a while, but eventually the house of cards will fall. When that happens, I’d guess it’s usually the moneylender rather than the MFI who gets paid. This kind of situation may have contributed to Grameen’s delinquency problems in the late 1990s.
How can an MFI (or a banking supervisor) tell whether this is happening before it turns into a repayment crisis? I don’t see an easy answer. Even if there is a credit bureau, it won’t have information on loans from informal moneylenders. Household surveys are the main tool I can think of, and I don’t know how practical they are, given their cost and the problem of getting truthful answers if the respondents think the survey is connected to the MFI.
