A recent Financial Times article regarding regulation of subprime lending to individuals in the US raised interesting thoughts that also apply to Microfinance lending. The core of the article covers the potential for predatory practices that subprime lenders in the US have used ensure that borrowers stay in debt and pay relatively high levels of interest rates for that privilege. This issue is one which occurs frequently in Microfinance lending as well.
The core of the dilemma was outlined in the article as follows: “There is little doubt that instalment loans land some borrowers in trouble. The harder thing to determine is whether there are offsetting benefits.” The article than quotes a lawyer who works for subprime lenders noting that these loans are made to individuals who desperately need money, usually for an emergency that has cropped up in their lives. Unexpected and uninsured medical expenses, car repair issues, and so forth are clearly a threat for the poor in the US given that most poor people also lack savings. As noted in a Federal Reserve study, 30% of the US population did not have resource to make a $400 emergency payment.
However, perhaps the discussion is about the wrong topic. The real issue may be that those using predatory credit are just not earning enough to build up financial security for themselves and their families. Perhaps the real solution is not more regulation of predatory lenders but policies such as an increased minimum wage or support for children as proposed by Mitt Romney so that families are not forced to use the predatory credit that keeps them forever in debt at high interest rates.
