Alan M. White


Deregulation of usury laws, in the United States and in developing nations, has permitted various forms of small loans to be made to the poor and the working class, sometimes at very high prices. In the case of credit, more is not always better. A human development approach to evaluating the welfare impacts of credit products for the poor asks these questions: does a credit product or program increase income or consumption, achieve savings through investment in capital goods, or smooth consumption and avert crises, all at a reasonable cost? Or does the credit on balance redistribute income away from the poor, without adequate offsetting benefits, or produce overindebtedness and declining borrower living standards? The model of successful small-loan programs that may enhance the welfare of the poor is the work of the Grameen Bank in Bangladesh. Grameen Bank’s microlending, savings, and insurance programs seem to have been effective in improving the lives of some Grameen borrowers. On the other hand, the experiences of South Africa and Bolivia with rapid expansion of microcredit were more problematic, resulting in crises of overindebtedness and, in the case of Bolivia, a social revolt by borrowers. Even after the crisis in Bolivia, however, some microlenders and their borrowers fared better. The experiences in these different contexts, as well as the United States’ experience with payday lending, offer important insights into the benefits and risks of different credit products and programs for the poor. These insights can inform the next generation of consumer credit regulation, which should promote responsible lending based on full credit reporting, insurance, workouts to protect against and mitigate defaults, continual repayment of principal, differentiation based on credit use, and simple and transparent pricing.



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