1. Why do microcredit banks have to charge such high interest rates?
(Microcredit usually ranges from 2% to 5% per month)
This is one of the most important questions for those who have been deeply moved by the effectiveness and innovation of microcredit, but are new to the subject and do not understand the interest rates and operations. In the United States, banks give loans at rates which are approximately ½ to ¾ less than microcredit institutions – a seemingly significant difference. However, economic environments in third world countries are very different than in the first world.
The basic understanding for integral economics, which is inclusive economics, is to provide services which recycle and make money, rather than to rely on donations in order to help the poor. Thus, a project seeks financial self-sufficiency in community services which allows it to contribute, in a real sense, continually, to the community, rather than simply receiving and giving hand outs. The “hand outs” model has been sharply criticized as ineffective and even destructive to socio-economic systems and human dignity. This is a critique with which I am in significant agreement. An integral economics operation works to create a better system which empowers the people to be involved in their own well-being by putting into action their abilities and talents.
In this question and answer, I want to give the main points of how the interest for integral microcredit is decided upon and how the term “profit” is used.
1. Integral microcredit banks go to the poor – to where they live – since it is difficult for them to travel to the city where regular banks are located. The members (villagers) of the Integral Trust – Village Integral Fund work from sunup to sundown, everyday, so there is little time for them to do much else. Their time is precious and to lose work, in order to go and try for a loan, which they are not guaranteed and may have to wait to see if they are accepted or declined, is a significant factor in their lives. In addition to time, there is expense in travelling to cities. A village banking system that goes to them is an innovative idea. Naturally it requires a more intensive and interactive personalized banking process, from the logistics of offices and technology to bank personnel who are literally in the field.
2. Integral microcredit banks provide a training process for its members in the basics of accounting, and in the basics of social and ecological awareness, in accord with the traditions of the villagers.
3. Integral microcredit projects empower the poor to begin to take leadership in the financial institution. This requires a lengthy process of education since many of the poor are illiterate and uneducated; however, they certainly possess the intelligence and motivation to better themselves. They share in the ownership and leadership of the bank.
4. Unknown to many people in first world countries, there is a kind of system of credit already in place in the poor countries. It is a system where the poor actually pay a premium for many of the same goods and services, for which we pay less. For financial services the poverty premium percentage can be well over 100% per year and in extreme cases it can be up to 1-2% per day, or 600% per year. Most of the poor, who are in need of money, are paying interest over 100%, if they can get credit at all. For example, one team with the ITF-Village Integral Fund was paying 17% per month, or 204% per year. In another village, banks will not give loans to women, and local loans are 20% per month. A socially responsible integral economics project (bank, fund, organization, institution) can provide high quality services at a fraction of the percentage rate, while also providing educational and other community services as mentioned above.
5. Integral economics projects do not typically receive subsidies, whereas regular banks (corporations), which are already making a profit, receive public “assistance” called subsidies. Thus, financial institutions lower interest rates making competition and economic diversity essentially impossible. In this kind of environment, large financial institutions are able to amass great wealth and control, which decreases economic diversity and sets the conditions for serious problems for the general populace. This is an important consideration for Americans since such practices give the illusion of a low interest rate, and thus a highly efficient and functional free-market. Adding this illusion of a functional free market to other dangerous practices such as the printing of money without backing, and massive consumer loans, an stable façade is created of the economic environment. Integral microcredit is not typically focused on operating in the first world, however. Integral economics operates in an environment where the interest rates are not artificially low, but are high. Most projects for microcredit are small and thus do not receive subsidies, nor do I believe they should unless there is serious need.
6. There is risk in investment, therefore, there must be a provision in the bank income to create a reserve and to cover any defaulted microcredit.
Speaking in the terms of the framework of mainstream economics, an integral economics microfinance project will have to make a profit from interest charged. I like to use the term income rather than profit to discern between the focus on profit and the focus on social and green business. The difference is a matter of awareness while also a tangible matter of how development occurs. Making an income from providing financial services allows for self-sufficiency and further growth of the social and green projects. Granted, in the integral economics field we will not see the astronomical and concentrated wealth present in rich corporations; what we will see is a more decentralized village level of wealth and prosperity, enough for small business ventures and for maintaining hygienic and ecologically sound living conditions. And, village level wealth will create the diversity necessary to weather market fluctuations which can be deadly to the poor. For example, a village that is heavily invested in monocultures of ginger or coffee will be at severe risk if serious fluctuations occur in the market. This occurs because the poor simply do not have the capital to change quickly from monoculture to monoculture as the market demands. Economic diversity at the village level helps to create stability just as it would in a first world economy. Villagers may not become rich from their small endeavors, however, they will live in dignity and have a measure of control and creativity in their work.