[Narrator]
Microcredit refers to the short-term lending of small sums of money.
Sometimes as little in value as $50 or $100.
Furthermore, there is usually no explicit collateral so a group of, say,
five individuals or five families might borrow from a microcredit institution.
And each of the families is responsible for making sure that the other families
repay the money.
If one family cannot repay, the other families are on the hook.
Microcredit thus uses small groups to monitor and enforce repayment.
Sometimes, individuals just borrow once from a microcredit lender,
repay the loan,
and that's that.
But it's quite common that families borrow from microcredit lenders
on a recurring basis.
They will take out some short-term loans for three or six months.
And once they repay those loans, they turn around and
immediately borrow some more.
There's a puzzle in microcredit and that is,
"How can these poor families afford to pay the rates of interest
they're paying to the lender?"
It's not unusual for a microcredit loan to have an annualized rate of interest of,
say, %50 or %100.
So if you're borrowing money at an annualized rate of, say, %50,
what is it you can do with the money that's so valuable that could possibly
justify such a high rate of interest on your repayment?
Some people, of course, are bankrupted by their microcredit loans.
But we also find many cases, in fact, the majority of cases,
where those microcredit loans are put to good use.
Sometimes, microcredit loans are used to start new businesses.
And the new business may yield a rate of return which justifies
the payment of the interest.
These new businesses don't have to be large, multinational corporations.
In fact, they pretty much never are.
But imagine someone living in a village who wants to set up a shop to sell,
say, cards for cellphones and that individual needs some initial capital.
Well, there's one rational for microcredit.
Other individuals use microcredit to finance their means of transport.
Say you need to buy a scooter or a motorbike,
maybe to help bring your child to school,
or to get to your job on the other side of town,
or to help run your business and
buy some inputs or supplies and bring them back to your shop.
Well, for all of those purposes, you might need transportation.
And again there, you'll need some initial start-up capital.
And the rate of return on getting that transportation might
be quite high.
A lot of microcredit isn't invested even though it may be
-- sometimes, it's supposed to be.
But it's used for purposes of consumption.
And when I say consumption, I don't usually mean buying fancy diamonds.
It can be something as simple and as essential as
taking one's child to the doctor when the child becomes sick.
Again, there you'll see that having some liquid assets on hand
through the microcredit can mean a very high rate of return.
Especially in rural areas, sometimes microcredit is invested in animals.
A poor family in a rural area might prefer to have some animals around
rather than to have a large, or even moderate size stock of cash.
When there's a lot of cash around,
there's a tendency that relatives or friends come and ask, basically,
for their share of the cash because they need it for some urgent purpose.
Social norms can make it difficult to resist.
Yet with animals, there's not necessarily the same problem.
If you have a cow in your backyard rather than some cash in your home,
it's much harder for your friends and acquaintances
to come along and ask for their share of the cow.
So microcredit can allow rural families to save resources in more efficient
and more productive ways.
Finally, the comparison isn't between microcredit
and all of these families having high net worth.
It's simply not going to be the case.
To a large extent, what has happened is that microcredit has replaced
traditional village or urban moneylenders.
And however high the rates of interest may seem on microloans, well,
they're actually usually lower than the rates of interest from the moneylenders.
The moneylender will charge more and furthermore, if you don't pay back
the moneylender, often the moneylender is actually
less gentle than has often been the case
with microcredit institutions which have a public reputation to maintain
to a greater extent.
In another unit, we'll now look at the empirical evidence on
just how much of microcredit is useful and how much is not.