WEEK 5: SUMMARY OF CHAPTER 7

SUMMARY OF CHAPTER 7

   Chapter 7 opens us to another agony endured by the poor which is the aspect of borrowing at a very high and exorbitant rate of interest which keeps them perpetually poor. The chapter equally examines the emergence of Micro finance Institutions (MFI) and their evaluation, the difficulty of lending to the poor, and how big businesses are being financed.

    The chapter opens with a range of poor women selling fruits and vegetables along the street which they borrowed from wholesalers in the morning to repay at night at a very high interest which makes their efforts less rewarding, thus keeping them constantly poor. For instance in Chennai (India), a woman borrowed vegetables worth of 1000 rupees in the morning and had to repay 1,046.9, which is equivalent to 4.69% interest per day. These excessively high rates had led to the emergence of MFI which tend to give loans to the poor at a very low interest rate in the name of Social Entrepreneurship. A good example is the case of Mohammed Yunus and Padmaja Reddy the CEO of Spandana. However we are told that despite the low interest rates, the poor tend to borrow less from these financial institutions caused by the rigidity and inflexibility of these financial institutions. For instance, before they can access funds they need to be in groups and that they should start repaying the loan just two weeks after they had been giving the loan. This has reduced the number of borrowers as those who don’t want to be in groups as well as those who were not ready to do early repayments usually stay away, thus making these institutions ineffective in lessening the poor’s situation.

    The high rates are due to a multiplicity of factors such as the high risks of defaults which is about 40%, the cost book keeping, the cost of monitoring the poor and the multiplier effects which result from the high rates as they tendency of default increases with high rates. Banks have a tendency of not lending the poor because of the lack of diligence and the time to monitor the poor, thus leaving them at the mercy of those exploitative money lenders. Larger firms face financial difficulties as they lack from who to borrow from. There is a normal graduation process where smaller business are financed by moneylenders and MFI and as they grow larger, they are being financed by Banks, but the problem lies in the fact that some businesses are bigger than moneylenders to finance and too small for banks.