Among the more benign activities of the United Nations is the dedication of various years to specific causes. Mountains, deserts, rice and dialogue have all had their 365 days of fame. There is little evidence that the attention has done mountains, deserts rice and dialogue any harm—but also not much to suggest that they have benefited either.
In the next 12 months the spotlight falls on microfinance, the business of lending small amounts of money to the poor, taking deposits from them, transmitting money on their behalf and insuring them. With luck, the UN’s effort will turn out to be substantial rather than symbolic. It certainly kicked off in style, with a big party at the UN’s New York head quarters that demonstrated how fashionable the subject has become. Among the 700 in attendance were top bankers, politicians and a film star or two. The UN also announced the appointment of an advisory panel to consider what may be impeding the growth and effectiveness of microfinance.
The success of the year depends to a great extent on whether the UN can harness its member states and financial institutions to establish some basic facts. Remarkably little is known about how finance operates outside wealthy countries. No good data exist on how many people have access to financial institutions, the breadth and penetration of banks in poor countries, the real cost of a loan and the time it takes to get one, the ease of making a deposit and so forth.
Micro finance itself is something of a mystery. There are no authoritative figures on the number and performance of microfinance lending institutions. There is not even convincing information, beyond lots of anecdotes illustrated by photographs of women in rural villages, about whether microfinance makes any. significant contribution to economic growth or is merely another philanthropic fad.
In principle, loans to the poor should bring great benefits, because the poor have less capital and often can borrow only with great difficulty. If at all, they ought to use extra capital more productively than the rich. Indeed, this might explain why even in the poorest places there is some form of money lending despite staggeringly high interest rates; 1,000% a year is not uncommon. However, such rates inevitably take a toll on enterprise and economic growth. The year of microcredit will have proven to be of great worth if it can first document the impediments to more efficient forms of financial intermediation and then begin to clear them away.
For example, the UN would do well to address the common complaint that banks ignore the poor out of class bias. If they do, the UN’s interest may hasten change: some financial institutions are already making efforts to work with the poor, either directly or by providing wholesale services to smaller financial institutions. And many working in microfinance complain that their small size and lack of traditional assets make it hard to attract capital either on their own account or through syndicated loans. A year hence, perhaps some of this will be changed.
What is microfmance? According to the text, how is the current performance of microfinance? (5 points)
What are the possible benefits of microfinance to the poor people? What should the UN do to promote microfinance? (5 points)
