Informal moneylenders continue to thrive in developing countries because of poorly managed microfinance initiatives

   
   
 Money lending
30 Nov 2017 17:15:34.063

PA 274/17

Predatory moneylending in developing countries is still rife, despite the introduction of low-interest ‘micro loans’ to help entrepreneurs in some of the world’s poorest countries.

Now, new research from experts at the University of Nottingham, Ningbo, China (UNNC), examines why this is.

In this research, published by the United Nations Conference on Trade and Development (UNCTAD), Dr Frithjof Arp from the Department of International Business and Management at UNNC, delves deeper into the ongoing debate about the effectiveness and sustainability of international microfinance initiatives to help alleviate poverty in some of the world’s poorest countries.

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The paper looks at two studies in Indonesia that help explain why the poorest borrowers benefit less from formal microfinance than the less-poor, and why informal moneylending continues to thrive. Indonesia was chosen as a research setting because, along with Bangladesh, it is often held up as an example of widely available microfinance.

Microfinance gives entrepreneurs and small businesses in developing countries, who lack access to banking, access to affordable financial products. The hope is that this will help poor people out of poverty. Microfinance is widely viewed as a way to promote economic development, growth and a way for micro-entrepreneurs to take advantage of economic opportunities.

This new research indicates however, that microfinance initiatives can have unintended consequences. Microfinance can produce unintended entrepreneurship opportunities for borrowers, including informal intermediation. This means that some borrowers become the informal ‘middle-man’ between formal lenders and poorer micro-entrepreneurs.

Dr Arp says: “Informal moneylenders, including predatory loan sharks, are common in the world’s poor countries, despite the introduction of government-supported microfinance initiatives. This led us to ask – if there is strong competition for these kind of lenders, then why are they not being wiped out?

“In the UNCTAD article, we provide an overview of two studies into microfinance. From these, we can see that some borrowers who qualify more easily for formal microfinance are ‘splitting’ loans, to lend on to even poorer borrowers. The consequence of this informal intermediation is that the poorest of the poor micro-entrepreneurs benefit less than the less-poor, and so this reinforces socio-economic hierarchies and stratification in these countries.  

“The spectrum of informal intermediation is quite wide, ranging from benign occasional intermediation (helping other poor borrowers) to malign and systematically deceptive intermediaries at the criminal ‘loan shark’ end of the spectrum. In addition, informal intermediation is just one of the management problems making formal microfinance initiatives less effective than they might be.

“We now need to develop measures on how these problems can be reduced and stop predatory lenders from taking advantage of poorer borrowers. Formal microfinance initiatives also need to improve their management processes.

“It appears that formal microfinance initiatives are overlooking fundamental questions of competition from informal lenders. In addition, previous research has often been conducted in a vacuum, attempting to assess these initiatives in isolation. Our methodology gathers information from three different sources: borrowers, formal and informal lenders.

“As expected, preliminary fieldwork conducted in Thailand indicates that informal intermediation occurs in that country, too. Further research on the topic of microfinance effectiveness requires collaborators in multiple additional countries.”

A full copy of the paper can be found here

To join the debate on microfinance effectiveness and help spread information on this important topic, please connect to this LinkedIn introduction

For further information and research collaboration, please contact:

Dr. Frithjof Arp - Frithjof.Arp@nottingham.edu.cn

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Story credits

More information is available from Dr Frithjof Arp from the Department of International Business and Management at UNNC, at Frithjof.Arp@nottingham.edu.cn

CharlotteAnscombe

Charlotte Anscombe - Media Relations & Campaign Manager

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