Saturday, 29 October 2011
Macrolending - An Alternative to Microlending
Above is a trailer for a documentary titled The Micro Debt, which seems to criticize microlending as a tool for alleviating poverty.
I've had a Kiva account for a while. Kiva allows any of us to lend money to entrepreneurs in developing countries. But I've always been unsure about how effective this is because when the money is lent to the entrepreneur in developing countries, it is at extremely high interest rates (around 30 to 40 per cent). Most businesses in developed countries struggle to even produce 10 per cent, so to expect people in the developing world to earn 30 or 40 per cent is highly optimistic.
The answer to poverty, in my opinion, can be found in Asia, especially in China. Institutions need to be in place to create labor-intensive low-skilled jobs. The products are then normally exported to developed countries.
Kiva must change. Instead of lending money to microfinance institutes at zero per cent interest who then relend that money to poor entrepreneur for 40 per cent interest, Kiva should take lenders' money and instead lend it at zero interest rate to large labor-intensive companies like Nike, Adidas, Foxxcon, or HTC on the condition that in return for receiving zero interest loans, these companies must hire people from poor countries. Kiva can then pay auditors like Ernst and Young or PricewaterhouseCoopers to audit these firms to provide to Kiva and microlenders assurance that a certain number of workers are being hired and paid a certain amount and that basic labor rights are maintained, e.g. the right for workers to go to the toilet.
If the venture does not work, the lenders lose money. If the venture works and profits are made, it can be split in half between Kiva and e.g. Nike (or any other proportion the two organizations negotiated). Either way, for labor-intensive companies there is a no-risk venture as all the risk is absorbed by the lenders and all the gains are for the company.