Microlending, macro problems

At the sort of conferences I go to, microlending is often hailed as a solution to many of the developing world’s ills. Pioneered by Muhammad Yunus and his Grameen Bank in Bangladesh, microlending consists of lending very small amounts to extremely poor individuals to, for example, buy a phone for a village, or run a small business. The repayment rate, at Grameen, far exceeds commercial norms.

But microlending is not problem free. Absa, one of South Africa’s biggest banks, acquired a microlender as part of its attempts to get a better footing with the country’s black majority population — the bulk of which is unbanked. The result? Indiscriminate microlending has cut Absa’s profits by 25%. Clearly microlending needs many of the same controls and judgements that macro lending requires.

Microlending is a great, important movement. But once again, people should beware of seemingly simple solutions to complex problems.