Microcredit as a Variant Form of Sub-prime Lending

Promoting sustainable and inclusive financial development
Download 4 pages

This briefing note examines the consequences of financialization in the microcredit industry, comparing it to sub-prime home mortgage lending in the U.S.

Foreign capital flows generated by making microfinance sellable are funding its rapid growth in a manner similar to the sub-prime mortgage lending. The internationalization of the microcredit sector has witnessed a diffusion of ideas and technology. On the flip side, it has encouraged the inflow of investors who are merely in search of higher returns. Such investments tend to neglect deposits, the financial service of greatest value to the poor. They inhibit autonomous financial development at the grassroots level, and retard domestic financial intermediation and financial deepening.

In order to promote sustainable and inclusive financial development, the paper advocates the development of financially-inclusive and locally-embedded institutions in a distributed system. Such systems would offer the possibility of sustainable financial development for the poor by:

  • Extending deposit and other services to low-income households;
  • Adopting policy and regulatory frameworks that support financial inclusion;
  • Providing incentives for institutions and systems to adopt modern drivers of inclusion,
  • Finding innovative technological and regulatory solutions for deposit mobilization.

About this Publication

By Conroy, J.