Microfinance borrowers vs Entrepreneurs

There are two reasons for repaying a Micro-finance Institution (MFI):
(1) everyone else is repaying. “If I were convinced that everyone else was about to default, I would assume that the organization was about to go under and would therefore give up on getting any further funds from it.”

(2) I will get a new loan in the future

MFIs are inherently fragile
…because they are built on this “combination of collective responsibility and an ongoing relationship.”

people repay because other people repay, so once people stop, it is hard to get them to restart. This gives reason for MFIs to prioritize repayment discipline over everything else. “Opening the door to defaults, even as a way to encourage necessary risk taking, may lead to an unraveling of the social contract that allows them to keep repayment rates high and interest rates relatively low.”

Therefor, MFIs give their clients every incentive to play it safe.

The spirit of microcredit vs true entrepreneurship
This focus on ‘zero default’ creates a clear tension between “the spirit of microcredit and true entrepreneurship, which is usually associated with taking risks and, no doubt, occasionally failing.”

“[This] implies that micro-finance is not the natural or best way to finance entrepreneurs who want to go beyond micro-enterprises. For each successful entrepreneur in the Silicon Valley or elsewhere, many have had to fail. The microfinance model is not well designed to put large sums of money in the hands of people who might fail. This is not an accident, nor is this due to some shortcoming in the microcredit vision. It is the necessary by-product of the rules (‘social contracts’) that have allowed microcredit to lend to a large number of poor people at low interest rates.”


All quotes are from Poor Economics by Abhijit V. Banerjee and Esther Duflo

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