April 21, 2008
While doing research on the "democratization of credit" in the United States during the 20th century, I recently came across the following passage in the book, Financing the American Dream: A Cultural History of Consumer Credit by Lendol Calder. The passage describes a marketing strategy of "personal finance" companies - firms established in the early 1900s to offer consumers small loans. Before this, besides getting a loan from family or friends, or receiving credit from retailers on a case-by-case basis, ordinary folks had difficulty securing loans. Calder writes,
The most common feature of their business propaganda was the ‘success story.' These stories were designed to emphasize one critical point: the productive nature of small loans. Beginning with descriptions of the misery of unfortunate borrowers, the lenders' success stories narrated how legal cash lenders helped borrowers escape the industrial conditions that lay at the root of their economic misfortune. Very often the stories ended with the borrower an independent businessman or businesswoman.
The type of stories described in this passage sounded familiar to me. They sounded like the "success stories" that a number of NGOs tell - in glossy publications and on their websites - to encourage people to contribute to (or invest in) their microfinance programs. For one example, check out the hompage of the Grameen Foundation.
Calder's book goes on to provide some reasons why personal finance companies positioned their loans as "productive," even though they were largely used for "consumptive" needs (often as a shock absorber). "Most loans extended by small lenders bailed households out of financial emergencies," Calder writes. He goes on to explain that by positioning the loans as "productive," personal finance companies aimed to counteract the lingering influences of Victorian money management ethic. This ethic held that only loans extended to merchants and captialists were legitimate because these people made something with their money.
Why point out the apparent similarity between the "success stories" of the early 20th century in America and those of today in the developing world? Only to iterate a couple point already made by many in the international development community: (1) that not everyone is cut out to be an entrepreneur; and (2) that not all microloans are used to start or expand small businesses.
Indeed, it is very unlikely that every microloan offered today is spent on such ventures as starting a fruit stand or expanding a sewing enterprise. In a recent article on The New Yorker's website, James Surowiecki points out that microfinance loans are often used for consumption smoothing, and for non-business-related expenses, such as financing a child's education.
Indeed, it is worthwhile to note that using microloans for reasons besides starting or expanding a small business isn't necessarily bad. For example, a loan can help a family recover from the shock of sickness of an income-earner without having to sell productive assets. Ideally, savings should serve this purpose. But sometimes a modest-sized loan with a modest interest rate for a short period can accomplish something similar.
This being said, there are dangers to taking out loans for consumption smoothing. The debt trap that many who use "payday lending" services in the United States fall into is an example of such a danger. This involves individuals taking out loans at very high interest rates to pay off existing loans, which results in them being unable to step off a loan "treadmill."
Moreover, it is important not to lose sight of the importance to poor people and those of modest means of savings, insurance, and investment products. "Success stories" of poor people using these products may take longer to come about (and may not be as photogenic as a woman entrepreneur sitting in front of her fruit stand). But savings, insurance, and investment products are nonetheless critical to helping people in developing - and developed - countries build wealth.