interview
Deepak Lal on Grameen Bank and Microfinance Institutions
2016
Summary
Deepak Lal argues that while he has no objection to microfinance institutions as private charitable ventures, the hype surrounding them is unwarranted. He contends that the empirical studies show their effect on any index of poverty is very limited: they may smooth consumption modestly but create few durable assets that would generate future income. He adds that most such institutions survive only on subsidies from NGOs or governments, and that if these were withdrawn they could not compete with commercial banks.
Drawing an analogy with traditional Indian chit funds and rotating savings pools, Lal suggests these informal mechanisms already let people promote short-term savings and finance consumption. He is unconvinced by the microfinance sector's central claim that group lending is inherently superior to individual lending.
Key points
- Lal is not opposed to microfinance institutions as private charities but rejects the hype casting them as the answer to poverty.
- Empirical studies show the effect of microfinance on measures of poverty is very limited.
- Microfinance mainly aids current consumption and creates very few income-generating assets.
- Many microfinance institutions depend on subsidies from NGOs or governments to stay afloat.
- Without those subsidies, such institutions could not compete with commercial banks.
- Traditional Indian chit funds and rotating savings pools already enable short-term saving and consumption.
- Lal questions the claim that group lending is superior to individual lending.
Transcript
Deepak Lal on Grameen Bank and Microfinance Institutions
Source: https://www.youtube.com/watch?v=bbij8FY0ILw Duration: 122.3s
Speaker 1 (00:00): But don’t get me wrong, I’m not against them in the sense that I think you should shut them down because, you know, they’re private institutions, they’re private charity once over the other. Who am I against that? So I’m not against them in that sense, but I think the hype which people are surrounding them, and this claim that somehow this is the answer to poverty, I don’t think that’s true. because they don’t create, some do, very small numbers, but all the studies show that in fact the effect on any indices of poverty is very, very limited. So consumption helps, but you say you’re creating assets which will then lead to future consumption, or current consumption is very, very limited. So the results grow. In fact, the other thing is that if you take away the subsidies, which keep them afloat from NGOs or governments or those other things, then they would not be able to compete with commercial banks.
Speaker 2 (01:03): In India there used to be chit funds, okay? And this is all over the world. You find people who collect together and they just pool their money, instead of consumption, and you have a rotating system that means, you know, I put in 10 rupees, someone wrote put in 10 rupees, and after a month or what have you, then it comes around.
Speaker 1 (01:28): the first person who put it gets the whole kitty, and that continues. So that’s some way in which you can actually promote savings in the time being,
Speaker 2 (01:37): short-term savings, to which can then allow you to consume something.
Speaker 3 (01:40): And that’s been going on, but nothing against that. But I’d like to say, as a result, you can create a general model in which, you know, this collective, and the point is, all this stuff that the Dhammean Bank
Speaker 1 (01:52): and all the other microfinance institutions say that somehow lend into these group, Group landing is better than individual landing ever since then. I have no chance to go up there.
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