An Unfortunate Teaching Moment.

The governments of India and Bangladesh are making plays to take-over/regulate microfinance in a much more direct manner than they have been.

I do not personally think this is a good idea, and most of that argument can be found here and here. It will be a great teaching project, as I like to cover microfinance when I have time in my development classes: both its advantages and disadvantages. It is not a magical aid program that will save the world, but it does provide certain people among the poor to improve their circumstances. That being said, group-lending can also isolate those who default on loans not just from the credit-market but from other social links, which can make them worse-off than they were before the loan.

I like to encourage my students to do their own digging, put aside ideology, and just use the tools given to them in basic micro and macro to determine if government or other institutional intervention is necessary and efficient. As the "death by bureaucratization" of microfinance will lead people back to local landlords and gangs for their credit (a system we already know is rife with problems), suspicion of government intervention is warranted. Not to mention the idea that the poor owing money to the government around voting-time could be an issue.

But is there economic justification (putting aside the tragic suicides and political pressure) to regulate even more (yes microfinance is already regulated) this kind of activity? This is a good teaching moment in terms of the experiment of more government intervention into a market, but I do feel its an unfortunate one. Will underground economic activity increase? How will the government change the way microfinance institutions loan if they allow them to continue? Who will be shut out, and who will be allowed in?