Monday, October 16, 2006

Micro Finance Pro and Con

With the announcement of the Nobel Peace Prize going to Bangladesh Banker Mohammed Yunnus and his micro-credit bank Grameen, one has to ask why he did not get the Nobel for Economics, considering the neo-liberal American dweeb that did.

I have blogged here on micro-credit before, and it is, despite its faults and limitations, an alternative to NGO's, development Aid from the OECD States and IMF World Bank loans to the State.

Banker to the poor who changed lives of millions
By Justin Huggler. Mohammed Yunus is not a statesman or world leader. He is not feted everywhere he goes. He is an economics professor who lives in a small apartment in Bangladesh.

Banking for the poor Pakistan Dawn

"A person doesn't have to be rich to become creditworthy. Credit, he says, should be accepted as a human right," Younus told Gulf News in an earlier interview. "Credit is the last hope left to those faced with absolute poverty. That is why I believe that the right to credit should be recognised as a fundamental human right," he said. Righting a wrong with alternative credit

However there is a down side as I mentioned. High interest rates, overblown bueracracy, anxieties about paying back the loans, etc.

The Grameen Bank Founder Muhammed Yunus Gets the Nobel Prize.

Are micro-finance institutions exploiting the poor?

Microcredit, Macro Problems

In the Summer issue of the CATO Journal, the American adovcates of Free Trade find that Banking regulations are a problem in the developing world because of the inherent corruption of monopoly. The author of this particular article finds that both Private and State oversight of these banks are equally corrupt.

Conventional government regulation of banks is likely to backfire because the regulators are frequently incompetent or corrupt. Instead of serving the public interest, regulators often end up serving the banking industry and its political supporters.
The most compelling evidence for this point of view is the many banking crises around the world in which large numbers of banks have failed, leaving governments with the cost of compensating depositors. By one count, there were 168 such crises from 1976 to 2002. The usual cause
is that both governments and private owners have turned banks into pyramid or Ponzi schemes in spite of government regulation. The banks are insolvent (bankrupt) because a high proportion of their loans are bad and will never be repaid. Yet the banks can remain liquid and continue to operate for years because new deposits keep coming in. Such schemes are possible because of explicit or implicit government guarantees and insurance of bank deposits that reduce the incentive for the private sector to monitor the financial health of banks.
Rethinking Bank Regulation: Till Angels Govern
by James R. Barth, Gerard Caprio Jr., and Ross Levine
Reviewed by Robert E. Anderson
Cato Journal
An Interdisciplinary Journal of Public Policy Analysis
Volume 26 Number 2, Spring/Summer 2006

While allowing removing deposit insurance from the banks might appear as a good idea on the surface the experience in Alberta shows that it is not. The Dial Mortgage scandal and the Principal Trust scandal of the early eighties shows that those that use uninsured banks can be ripped off just as easily. And I need not remind readers of the ultimate Ponzi scheme in the U.S. the Savings and Loans debacle of the ninties.

A real alternative would be to create peoples banks, credit unions, with low interest rates and micro-loan economics. This would allow the working poor to develop savings thus capital.

An End to Poverty: The Will and the Means

Having survived the depredations of war, sickness and a natural disaster in rural Bangladesh, Pramila was sure her life would unravel completely when a fire destroyed her grocery store, her entire stock, her two cows and her stored-up crops.

Help was at hand, however, thanks to a revolutionary finance system known as microcredit, pioneered in the 1970s by Muhammad Yunus and his Grameen Bank. “The Grameen Bank visited her the next morning,” Yunus records in his autobiographical book, Banker to the Poor. “Part of the loan she used to start up a small grocery store and the rest she invested in fertilizer for her irrigated land. With the help of her three grown sons, she was able to start paying off the loan. Three months later Grameen gave her a housing loan, and she constructed herself a new house.

“She is currently in her twelfth loan. She owns and leases enough land to sell about 10 mounds of rice paddy [unmilled rice] a year, after feeding her whole family” (see our interview with Professor Yunus: “Banking on Trust”).

The fact is that the Grameen Bank is one model, and just that, one that needs to be refined to overcome its weaknesses. Namely that it remains a monopoly bank rather than a peoples bank.

Micro-financing is a model that could be and should be applied in the advanced industrial countries as well as in the newly industrialized and developing countries. It is the missing element in Welfare Reform in North America which does not provide credit opportunities for the poor. Welfare itself is anti savings and credit which leaves the poor with an all or nothing alternative.
A living wage would be the alternative to welfare in advanced capitalist countries.

The other missing element is median financing to worker/producer owned cooperatives. Allowing workers to both create new businesses on a cooperative model as well as to bail out failing capitalist enterprizes that communities rely upon, but which are shut down as inefficient or unproductive. These need to be placed under worker control, and refinanced by a credit system ideally through credit unions, union pension funds and all three levels of government.

New initiatives for micro-credit individual businesses and worker/producer cooperatives could be financed by venture capital such as Labour Funds, which failed because they were directed at long term risky ventures like Bio-Tech. Instead a tax credit system, as well as government banking gurantees could allow for a pool of capital to be used for these purposes.


Free Trade

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