Friday, November 12

Can microcredit work in the first world?

Microcredit is extremely helpful in poor, third-world environments, but can it work in the first world?

Microcredit is the practice of giving small loans to entrepreneurs who wouldn't otherwise have access to credit. Usually, people apply for loans in groups, where some group members don't receive their funding until others have paid theirs back. This lessens the risk of default because people experience peer pressure to repay their loans, and because applicants will tend to be more responsible since people won't want to form a group with someone who is unlikely to repay their loan.

Microcredit has been highly successful in the third world, particularly among female borrowers. If someone is dirt poor, a little money can go a long way toward purchasing supplies that can allow the person to start a business. The success of microcredit was recognized in 2006, when Muhammad Yunus and the Grameen Bank were awarded the Nobel Peace Prize.

But while microcredit makes sense in places such as Bangladesh, it hasn't really caught on in the first world, probably for a couple of reasons. First, there's a well established banking system that can provide loans in the first world, and it's easier to get access to credit — walk through any airport or university student union building these days and someone will probably try to sign you up for a new credit card. I don't know much about Bangladesh, but I'm guessing it's a lot harder for the average person to get credit. Second, what's considered "micro" in Bangladesh is way smaller than micro in Canada. The Grameen Bank's average loan is for US$390. That kind of money can go a long way in Bangladesh — it's what the average person earns in about three months. But $390 won't buy an entrepreneur very much in Canada.

Still, given the success of microcredit in the developing world, it's a little bit surprising that it is a relatively foreign concept in Canada. But it turns out that microlending is being test-driven here — the Community Micro Lending Society is providing small loans to Victoria entrepreneurs to start their own companies (hat tip to Agent Flair). Their organization is apparently based on a similar organization that has been thriving in Montreal. The society's loans are allowing entrepreneurs to get into the market, such as this immigrant, whose $5,000 loan has allowed him to purchase his own cab:

Microlending could have useful applications in Canada. It can help people in unique circumstances, such as the cab driver. One of my classmates in the honour's economics program at the University of Victoria was interested in whether microcredit could be useful for people living on First Nations' reserves, where incomes tend to be lower than the rest of the country and where property rights issues can make it difficult to get a loan.

It will be interesting to see whether this concept will take off and spread to other North American cities, or whether it remains more of a developing-world phenomenon.