What are the cultural costs of globalization?
The Downside to Micro Lending
Micro lending has become a new way for people in developed countries to help those in poverty. It only takes a couple dollars and the internet to start lending your money to the person you find the most deserving. Billions of dollars have been loaned over the past 10 years using micro lending businesses. Although micro lending has provided loans to millions of people in poverty around the world, research has shown that it's not as helpful as we think.
Kiva is one of the more popular micro lending websites that is being used to lend money to people in need. It is a non-profit organization, and they do not charge any interest on any of their loans. There are hundreds of other micro lending businesses around the world, but not all of them are as trustworthy as Kiva.
In countries where these micro lending businesses are less regulated, borrowers are signing for loans without being aware of all of its stipulations. They are rushed into signing contracts that they do not understand fully. A large number of these businesses are charging what Americans would find an absurd amount of interest. Average interest on these loans are 50% to 120% a year for borrowers, while the world average is around 31%. $900 loans turn into $1,500 when completely paid off with a year's worth of interest. With rates like those, borrowers fall behind and even default on their loans. Then they are hassled by collection agencies for months. Some collection agencies have even been reported posting flyers that tell others to not lend to specific people who have not paid their loans.
Studies of micro lending have been conducted in the past few years to see how effective they are in improving person's life. Data has proved that these loans don't exactly improve peoples' lives, but in fact do the opposite. The number of business activities a person who received loans did actually shrank. With high interest rates, borrowers are struggling to actually make a profit from their business. The income they do make from their loan will be used to pay back the loan and its interest. A majority of businesses have failed because they are unable to make enough profit to live on. Also what most people don't understand, is that most borrowers do not have the education and skills needed to maintain a strong business. They are unable to expand their business and improve their income significantly, because they operate at such a small scale.
A Stanford study suggested that instead of micro lending, people should invest in larger businesses. With those investments, companies can create factories that would employ hundreds of people. These companies would pay their workers reasonable wages, compared to the income they may have been making before. Countries like China and South Korea have taken large numbers of their population out of poverty by investing in larger companies that would create jobs, while countries like the Philippines and Indonesia, who receive a lot of micro lending, have a population that is still mostly stuck in poverty.
I think that micro lending is a really good idea, but all of its impacts are not completely understood yet. If more companies were like Kiva, and weren't trying to make a profit off of their loans, then I think that micro lending would be a great way to help others. Instead of micro lending, more people should try investing in companies that create jobs and hire workers in struggling countries. That would be an effective way to fight poverty around the world.
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