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 Development is the Key
 
Disasters at the bottom of the pyramid
Business Standard, India Thursday, November 11, 2010


India's current micro-finance controversy shows why profiting from the poor can be a bad idea - for the poor. The possibility to make money from the poor has made the term 'bottom of the pyramid" by C K Prahalad attractive. Fw have looked at it critically. The poor were benefiting from the cheap credit injected by the federal reserve. The idea of profiting from the poor can be a bad idea for the poor,a nd the benefits of microfinancing is largely exaggerated, writes Kanika Datta in Business Standard.

The term “bottom of the pyramid” (BOP), coined by the late C K Prahalad, became wildly attractive in the early noughties, in part because the concept, which suggests that it is possible and legit to make money from the poor, provided a leavening justification for the animal spirits of capitalism in poor countries like India and China with their growing list of Forbes billionaires.
 
On the verge of the second decade of the century, it is worth wondering why few analysts have chosen to re-examine the concept in a more critical light (Prahalad’s University of Michigan colleague Aneel Karnani has been almost a lone voice among early critics). It is, after all, the pursuit of a BOP concept in the shape of sub-prime lending that precipitated the financial crisis from which the global economy is only just recovering. And now, there’s the controversy over micro-finance in India.

...

The sub-prime business lasted as long as it did because it created a boom industry for investment bankers and hedge funds in a range of opaque financial instruments that disguised the precarious nature of the underlying business.

The poor were seemingly benefiting from the flood of cheap money, courtesy the Federal Reserve. In his brilliant book The Big Short, Michael Lewis describes how au pairs and Vegas strippers came to hold multiple apartments in prime areas. Sub-prime lending spurred not just asset prices around the world but also the obscene bonuses that acquired a weird sort of legitimacy even as a collusive institutional structure developed around the business, involving regulators and rating agencies.

...

Essentially, the sub-prime business amounted to greed built on a spurious idealism. Explaining the complex sub-prime-linked synthetic financial products, he wrote, “The CDO (collateralised debt obligation) was, in effect, a credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold.” The net result of that financial alchemy was that it was Lower Middle Class America that was (and is) the worst hit when the system crashed.

India’s current micro-finance controversy shows why profiting from the poor can be a bad idea — for the poor. Unlike sub-prime lending, micro-finance is a viable business, though its role in poverty alleviation may be exaggerated. A range of institutions from Grameen Bank in Bangladesh to Basix and S K S Microfinance in India have demonstrated the benefits to millions of poor people excluded from the financial mainstream.

...

That’s also the problem. For every upstanding institution that is careful about how it lends and truly helps poor people, there are thousands that focus on the profit, lend indiscriminately and resort to moneylender-type recovery tactics. That explains the spate of micro-credit-linked suicides that have marred the reputation of the entire business.

...

Who’s gained? Certainly not the poor.

This article was published in the Business Standard on Thursday, November 11, 2010. Please read the original article here.
Tags- Find more articles on - microfinancing

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