Thoughts on microloans

For all the debate that rages about whether or not microloans help the poor escape poverty, and whether they actually do more harm than good by over-indebting borrowers, I think the benefits of "forced trying" are often overlooked. When a poor person takes out a loan (or any person for that matter), they know that they must make repayments on time. This means that they must come up with a predetermined amount of money by a certain date. For a poor borrower, this "financial discipline" isn't something they've really had the chance to experience before. Furthermore, in the case of the poorest clients, loan repayments are often comparable to the entire family's monthly savings. This means that they must make a significant effort to earn more and spend less while repaying the loan, or "forced trying."

After spending a few months here and visiting dozens of microloan clients, I've begun to notice some larger themes in their attitudes. Perhaps they only pertain to Cambodian clients, but I think some hold true more universally. For one, although their situation often seems dire from our perspective, the poor are generally unfazed about their condition. Although they must deal with problems like complete lack of health care or wretched sanitation standards, they've lived like this their entire lives. Humans have an incredible ability to adapt to and then accept the circumstances in which they live. Nobody really feels outraged that they can't get running water or electricity, so they end up not making a big effort to get those things by working creatively. In essence they're satisfied with the status quo.

Furthermore, they live in an environment where effort is not always repaid with a commensurate reward. They are more susceptible to severe weather and disease. Even if they increase the amount of rice they plant, or buy more pigs to raise and sell, the rice could be ruined by an untimely rain, and the pigs could all die from a disease. The end result is that through repeated experience, they learn that effort should only be made in moderation, and that risks should be avoided.

However, when a poor person takes out a loan whose repayments are on par with her family's monthly savings, changes in lifestyle and work habits must be made. In order to continue with the current standard of living and make repayments for the loan, the borrower must find other ways to make and save money (particularly if the loan did not go towards an income-producing asset or investment). The borrower learns that she and her family are capable of saving more money by working harder and thinking creatively. By making repayments on time, the borrower is rewarded with permission to take out more loans, and avoids the loss of collateral. Essentially, the loan is providing a rare opportunity for the borrower to experience a formal, structured, rule-based environment that we in the developed world take completely for granted, one in which effort is consistently rewarded.

I think that the positive experience of being rewarded for their work helps poor borrowers believe that they indeed have some control over their situation, and that if they want to change it, they can -- if they make an effort.