[p2p-research] anti-microfinance movement in nicaragua protests usury

[Ryan Lanham]

Hi Michel,

Here is the math:

Let's say you start a school in Kenya and borrow 1,000 euros from me to
start it.  At the time of transaction, you sign a note saying you will
payback 10,000 Kenyan currency units rather than 1,000 euros.  The interest
rate is 20%.  So, in simple interest terms, you will payback 12,000 Kenyan
units over 12 months.  In that 12 months, the Euro increases in value and is
no longer worth 10,000 Kenyan units but 15,000 Kenyan units.  You
nevertheless pay back 12,000 units.  The microfinance firm reconverts my
payments and I receive 12/15s of 1000 euros...thus, a considerable loss.

You won as a Kenyan if you could by something worth euros that didn't
depreciate much...like a printing press or a pizza oven.  You lost if you
were just capitalizing stock and it is sitting on your shelves.

Currency depreciation is a type of inflation.  Debters win when inflation
occurs.  Imagine it this way...you lend me gold, and I pay you back in US
dollars at a fixed current rate.  If gold prices increase, I win.  The thing
is, developing world currencies nearly always depreciate.  The sign of a
country "making it" is when their currency turns around...like Brazil's of
late.  At that point you no longer want to borrow, but to lend.  In the old
days (and currently) bad organizations like the IMF make you borrow in
dollars and pay back in dollars.  So you face the currency risk...that
has hammered many a small economy.

Ryan


On 11/17/09, Michel Bauwens <michelsub2004 at gmail.com> wrote:
>
> it's hard to understand for a layperson why there needs to be such a high
> interest rate ... if the normal bank would charge it, and of course they do,
> I also call it usury .. there's an enormous discrepancy between what they
> pay, and what they charge us, resulting in super-profits (before the
> meltdown that is <g>). Why does microfinance need to charge so much?
>
> If I follow  your own reasoning you end up with 1200 minus 100, is 1100, a
> annual profit of 10% ... I must admit that sounds reasonable .. why the loss
> if there is no default, currency exchange losses?
>
> Michel
>
>
> On Mon, Nov 16, 2009 at 8:16 PM, Ryan Lanham <rlanham1963 at gmail.com>wrote:
>
>> Not quite the whole picture as I have seen it.  As I have mentioned
>> before, I lend a lot on microfinance sites.  My most common is MyC4.com ...a
>> Danish non-profit working in Eastern Africa mostly.  I know a fair amount
>> about the field.
>>
>> I often lend at rates up to 20%.  So far, I have lost 10% of my
>> funds--that is, I have a negative ten percent return...if I had 1000 euros,
>> I now have 900.  Why?  Not defaults.  In general, people pay because it is a
>> very good deal for them.  The great deal for the borrowers is that the
>> currency risk is bourne by the lender.  So I lend in Euros...they borrow in
>> local currency.  As the local currency falls versus the Euro (since most
>> global currencies most closely track the dollar or simply fall until
>> worthless anyway...) the lender borrows current dollars without any risk of
>> ever paying back even the full amount borrowed much less interest.  If I
>> were a local person, I'd buy all the tangible low-depreciation assets I
>> possibly could through microfinance.  That is, you want to buy printing
>> presses, machine tools, farm tools, etc.  You don't want to buy carrying
>> stock...which is what most of the loans are for...retail trade.  The most
>> common developing world business is unfortunately buying a manufactured good
>> from the developed world (e.g. a cell phone) and then marking it up.  Not a
>> horrible business, but not a very productive one either.  On a GDP basis,
>> there is much greater benefit to be had by buying raw materials and then
>> making something...the Chinese learned this because they have excellent
>> economists...thousands of them now.
>>
>> I don't make such loans to make money..those who try to do so have long
>> since left the field...far easier for me to lend money to GE or J.P. Morgan
>> if I want to make money.
>>
>> So to call what is going on "usury" is a bit much.  Drying up these loans
>> will only cut capital to the poor...one of the last places where it is
>> useful.  El Salvador may have different issues, but the article paints with
>> a broad (and seemingly ignorant) brush.  What they are saying is certainly
>> not the case in Africa...or most of Asia.  If a person wants to assure they
>> are loaning in a manner favorable to the poor, I recommend MyC4.com which I
>> have personally witnessed do a great deal of good.
>>
>> Ryan
>>
>>
>>   On 11/16/09, Michel Bauwens <michelsub2004 at gmail.com> wrote:
>>>
>>> http://www.commoner.org.uk/blog/?p=220
>>>
>>>
>
>
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-- 
Ryan Lanham
rlanham1963 at gmail.com
Facebook: Ryan_Lanham
P.O. Box 633
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