Most interesting sentence I've read all day

From Tyler Cowen:

The piece attempts to redress many myths of micro-credit. For instance it is often claimed that micro-credit doesn't involve collateral, but that isn't quite true. The borrowing is done in small groups, and if you don't pay your share the neighbors come and take away your TV set. In reality micro-credit takes the collateral-seizing function away from the bank and puts it in the hands of our neighbors, thereby increasing loan repayment rates.

The biggest critique of microcredit so far is that the borrowers don't transition to traditional banking. This highlights one of the major reasons why. One of the barriers to providing credit to the poor--particularly in developing nations with no cultural history of mass banking--is that you can't repossess your collateral. If you try to foreclose on a house, neighbors will often rally to block you; if you sell it, they will prevent the new buyer from taking possession¹. Microcredit dodges this problem by making the liable party a member of the community.



¹This is hardly unique: it was a giant problem in America, particularly during depressions, when neighbors often showed up at foreclosure auctions, intimidated outside buyers to prevent them from bidding, and then bid trivial sums on all the property in order to return it to its former owners. This seems cute and folksy and community-oriented until you realize that this generally made the bank go out of business, or at least stop lending to that community, whereupon everyone complained that they couldn't get credit.