From Tyler Cowen:
The piece attempts to redress many myths of micro-credit. For instance it is often claimed that micro-credit doesn't involve collateral, but that isn't quite true. The borrowing is done in small groups, and if you don't pay your share the neighbors come and take away your TV set. In reality micro-credit takes the collateral-seizing function away from the bank and puts it in the hands of our neighbors, thereby increasing loan repayment rates.
The biggest critique of microcredit so far is that the borrowers don't transition to traditional banking. This highlights one of the major reasons why. One of the barriers to providing credit to the poor--particularly in developing nations with no cultural history of mass banking--is that you can't repossess your collateral. If you try to foreclose on a house, neighbors will often rally to block you; if you sell it, they will prevent the new buyer from taking possession1. Microcredit dodges this problem by making the liable party a member of the community.
1This is hardly unique: it was a giant problem in America, particularly during depressions, when neighbors often showed up at foreclosure auctions, intimidated outside buyers to prevent them from bidding, and then bid trivial sums on all the property in order to return it to its former owners. This seems cute and folksy and community-oriented until you realize that this generally made the bank go out of business, or at least stop lending to that community, whereupon everyone complained that they couldn't get credit.
You may get to see that kind of folksy behavior in the US again, if the realestate buble breaks as hard as I think it will.
There is/was a real estate bubble in rural, small town communities? Or do you expect the blue state suburbanites to successfully "intimidate the outside buyers"?
"and then bid trivial sums on all the property in order to return it to its former owners"
Doesn't the bank normally bid the amount of the mortgage to prevent this?
Is this (neighbors showing to bid) an "everybody knows" type of thing or is there actually some evidence or research to support it? As in, not a few anecdotes but some data to support that it was a "giant problem." And as in, some evidence that this was actually the dynamic that caused banks to go out of business. Because it sure sounds like acopcryphal bullshit. Because I have anecdotes too: my dad's neighbors certainly didn't show up when his family lost their house in the depression.
There's an episode of Little House on the Prarie where the townspeople block a foreclosure auction for Charles after he spends a lot of money on the mistaken belief that he has a large inheritance on the way. I seem to recall that Harriet Olsen was the lender, or maybe an agent for the lender.
In any case, the general theme was that it was the lender's fault for extending credit to Charles, who really didn't know any better.
James B. Shearer wrote: Doesn't the bank normally bid the amount of the mortgage to prevent this?
More to the point, how often does a real estate repo go to an open auction these days?
Often the circumstances dictate whether or not the bank will take a loss on a property. After their second child was born, my cousin and her husband wanted to get out of apartment rental and actually have a yard for the kids to play in. They found a duplex that was in a halfway decent neighborhood, but the unit itself had been gradually run down by a Series of Unfortunate Rents. Finally, the owner fell behind, and the bank took the property.
My cousin and her husband made the best offer they could reasonably afford, such that the real estate agent actually laughed and said, "I'm sorry -- I'll run the paperwork, but they'll never consider this." Yet a week later, they signed the closing papers. Apparently nobody else wanted the place and the bank was tired of dealing with it.
Charles Ingalls wasn't a financial whiz, but he wasn't this stupid. This is why I could never watch the TV show, it took too many liberties with the books.
Plus, like the 90s series, Dr. Quinn, Medicine Woman, its lessons were absurdly and annoyingly modern.
In most of the countries where micro-credit is important, there is very little that for-profit banks could realistically use as collateral for loans to the poor. Land titling systems are poor or nonexistent, not that poor people generally own their land anyway. Few people own durable consumer goods that are worth anything substantial.
Third-world citizens have to get pretty far up the scale before they acquire the kinds of assets that banks would be happy to view as collateral, unless they're producers or traders in goods. Farmers, for instance, have never had trouble accessing credit; their crops serve as collateral.
There is one real problem that keeps successful micro-credit recipients from transitioning into the regular for-profit banking credit, and that is that micro-credit programs sometimes compete with for-profit banks at the higher end of their clientele. My anecdotal sense is that foreign donors are most guilty of this, because they get to book the loans made through their micro-credit programs as successes when they report to their donors, and they have little incentive to start denying loans to successful recipients in order to push them into the real credit market.