Microcredit is not phony, it's not a dishonest way to drum up money for a big financial corporation. Microcredit doesn't give people money then adjust the rate on the interest. Microcredit doesn't sell the risky loans to someone else to try to further profit on them.
Microcredit also makes loans to people who pay them back. They generally don't make loans to greedy people. Microcredit makes loans to people who are just trying to better themselves.
In fact, the only way microcredit has been hurt is by less money coming in from these big financial institutions that were making these other phony loans. They were only were trying to get into loaning to poor people because they saw the profit margin there. This may well help microcredit in the long run.
Anyway, Time magazine interviewed the head of Women's World Banking, Mary Ellen Iskenderian, to ask her about this microcredit "phenomenon"
TIME: To what extent and in what specific ways is the worldwide credit crunch impacting microfinance in developing countries?
Iskenderian: There is evidence that microfinance is resilient to global market movements, compared to traditional lending, as it falls outside of the mainstream economy. And there does still seem to be equity available for microfinance; recently, for example, a couple of large private equity deals were completed in India. Repayment rates remain very high, 97% or 98% in many places. That results from good, old-fashioned credit methodology — you know a household's capacity to repay. That's the kind of old-fashioned banking that some people feel was absent in this latest round of banking disasters. At the same time, we are seeing many microfinance institutions (MFIs) scaling back expansion plans and, in some cases, raising interest rates as a result of the credit-spread increase and the rising cost of borrowing. Certainly, no one is taking their existing funding relationships for granted. My concern is that we have only begun to see the effect of the triple threat of finance, fuel and food issues on microfinance.
TIME: To what extent have the global economic challenges trickled down to impact the poorest of the poor?
Iskenderian:The impact on the poor, including the clients of our network, has probably been most evident in rising food and energy prices, which have meant that families may face trade-offs like the choice between paying back their loans or putting dinner on the table for their families. Microfinance doesn't target the poorest of the poor, as they need other types of intervention. It targets the economically active poor at the bottom of the pyramid. There are signs that micro-entrepreneurs will see higher interest rates, since the global credit crunch will likely require MFIs to raise interest rates as funding becomes more scarce. I am particularly concerned about the ramifications for women since, for many poor women around the world who are otherwise excluded from formal financial systems, access to microfinance is their only economic lifeline.
TIME: What prompted the development of a financial instrument like micro-insurance, and what's the broader impact of new financial instruments aimed at the world's unbanked?
Iskenderian: Product diversification came out of a recognition that lending alone is not the solution if our end goal is long-term poverty alleviation, which is why we in the industry no longer talk about microcredit, but microfinance. Many entrepreneurs in the developing world are only one seemingly minor catastrophe — like a hospital stay — away from financial disaster, so housing loans and insurance and savings products help create and preserve assets, leading to broader benefits for the economy as a whole. I can't tell you how many times I've heard women clients in our network ask, "Why can't I save for my child's education, instead of taking out another loan to pay for it?" The poverty alleviation benefits are magnified when microloans are supplemented with savings and insurance products.