Is This Microcredit Usury?
What is usury anyhow? Is it charging eighteen percent interest?
Twenty-eight percent? How much is too much interest to charge?
Are there any laws or ethical rules about what rates to charge
that make sense in all contexts? Let's look at this by starting
with programs designed to help the poor.
You may have heard of the various "microcredit"
programs that make small loans to poor people in various countries.
One of the biggest is Grameen Bank in Bangladesh, run by Nobel
Peace Prize winner Muhammad Yunus. These banks and programs have
lifted millions of poor families out of extreme poverty by providing
the funds necessary to start small businesses, or by helping
them expand the businesses they already have.
This is a noble goal, but the way these organizations operate
also gives us an interesting perspective and lesson on what a
loan can do even when interest rates are very high. Some might
think that Grameen Bank and other outfits are engaged in "micocredit
usury" if they knew the rates being charged. Grameen charges
as much as 20% annual interest, for example. The Acumen Fund
has recently put millions into a bank in Pakistan which makes
loans to small farmers--at 28% interest.
Is that too much? Given that these types of programs have
truly helped millions out of poverty it seems that the basic
idea is working. In that area of Pakistan where the Acumen Fund
is active money lenders were getting as much as 10% monthly from
farmers, so 28% annual interest is an improvement. But is it
still too high?
There are two perspectives from which to look at this. The
first one is from the view of lenders, who have to spend the
same time and resources to lend $100 as to make a loan for $10,000.
The interest provided by the first has to cover the cost of making
the loan (including paying local depositors 6% on their accounts),
and the costs of processing the payments made, and the cost of
the occasional bad loan. Obviously to function even at break-even,
the interest rates would have to be higher for very small loans.
But the more important question if we are worried about usury
or the exploitation of the poor, is what the actual benefits
of the loans are for the borrowers. For example, if a credit
card user in the states puts a television on a credit card and
pays 18% interest, the benefits are hard to measure, and are
primarily based on the pleasure of entertainment--there are no
real economic benefits. But consider a farmer in Pakistan who
borrows $130 to buy a bicycle with a trailer, which allows him
to carry three times as much produce to market. Perhaps he makes
$600 more each year as a result. That is a benefit which clearly
outweighs the 28% interest he might pay for a few months. To
charge $15 in interest for a loan that results in $600 of additional
income for the borrower is wonderful, whatever that rate looks
like to outsiders who are used to 6% home loans and 10% business
loans. In fact, in a context like this even borrowing from a
loan shark at 120% annual interest would make financial sense.
Whether the terms of a loan are usurious, then, or whether
they are in some way "unfair," is a matter of context.
It is not a matter of any specific rate charged. For an example
closer to home, I once loaned a friend $200 for $5 in weekly
interest. Do the math and you'll see that this is more than 100%
annual interest. You may think that I was taking advantage of
a friend, but honestly, he was a serious risk since he was unemployed,
so I thought I should be rewarded accordingly (and yes, I have
lost money on risky loans to people I know). Keep in mind two
other things as well; I was the only one who was willing to help
him out with a loan, and he had a valuable purpose for the loan.
Specifically it enabled him to buy the tools necessary to get
a job at which he then made thousands of dollars. In the end
he paid me a total of perhaps $25 to make that possible. Did
I take advantage of him or did I help him?
I have several such examples of my own "microcredit usury,"
if you want to call it that. There may have been times when the
loans were not for such beneficial purposes, but I never loaned
money to anyone to buy drugs or to put a down payment on a rent-to-own
couch. In other words, I tried not to loan money in ways that
made the borrowers situation worse. And if, after paying the
interest, the borrower is better off because of the loan, then
I can't consider it usury or in any way unethical--no matter
what the interest rate is.
Laws and ethical rules are handy guidelines, but relying on
them too heavily makes life an unthinking process. Context is
all important. It matters what the results are.