Welfare Economics and Regulation of Small-Loan Credit: Lessons from Microcredit in Developing Nations
45 Pages Posted: 20 Nov 2010 Last revised: 8 Jan 2014
Date Written: November 18, 2010
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? On the other hand, does the credit on balance redistribute income away from the poor without adequate offsetting benefits, or produce overindebtedness and declining borrower living standards? The empirical evidence on welfare impacts of microcredit, in the cases of Bangladesh, Bolivia, and South Africa, are reviewed. This evidence, together with the United States experience with payday lending, offers 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, and workouts to protect against and mitigate defaults, continual repayment of principal, differentiation based on credit use, and simple and transparent pricing.
Keywords: welfare economics, micro credit, payday loans, credit regulation
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