The global financial crisis has obliged the banking industry to tighten credit expansion, which, like all other measures has affected low-income groups.
Loss of employment has led many to face loan foreclosures, making their hardship even more severe.
In the US alone, millions of people have had to face the ‘dishonour’ of losing their homes being unable to service their mortgages.
The need for microfinance or small loans to poor people to tide over their difficulties has been underscored by the inability of traditional banks to provide credit to such customers. The success of ‘Grameen Bank’ in Bangladesh since the 1970s has encouraged many to consider similar facilities in the First World economies where the gap between the rich and poor continues to grow on the one hand and the growing unscrupulousness of loan sharks on the other (see previous editorial).
It is wrong to presume that microfinance is needed only in developing countries. In Britain for instance, more than 1.4 million low-income households do not have a bank account, while another 8 million are under-banked (or excluded from mainstream bank lending and credit cards, both of which are increasingly stingy, because of bad credit scores or irregular incomes).
The under-banked still have options. They can go to pawnshops, which might charge 100% annual interest on loans backed by assets. They can join their compatriots who take out unsecured loans from doorstep-lending outfits, with rates of up to 500% per year. Alternatively, there is payday lending, where the borrower gives the creditor permission to take money straight from his next pay cheque.
However, other options are emerging. Community development finance institutions (CDFIs), social enterprises that lend to low-income customers, charge much lower interest rates. They can afford to do so because their repayment rates are much higher. Their loan officers operate like post-office lending once did, assessing risk on an individual basis and tailoring products to the borrower’s circumstances.
Research shows that microfinance is not a welfare-to-work panacea. But with unemployment rates rising, any help should be welcome.
