The Economics of Morality

There is a lot of discussion in the media, mainly by the un-involved, as the chicken in the ham-and-bacon-restaurant story, about the morality of microfinancing variants and social entrepreneurship.

Morality is a consequence of economic forces by and large, whether we like it or not. Let us take the example of microfinancing.

Microfinancing is a concept of small loans, higher interests, more frequent re-payments and higher tolerance to delinquency in repayments because of genuine reasons of being unable to repay sometimes.

Who benefits in this game?

The financier defintely benefits because the interest rates are higher. The financier indeed should benefit because he needs increasing capital to invest further, and to grow his business of micro financing, and thereby cover larger cross-sections of the poor. Over time, the financier's target population spreads out further to a slightly higher economic level and hence larger coverage. This is plain law of physics anyway, since the water spreads equally across the lowest lying regions in its coverage, before the level of the water rises, and goes to wider areas.

Who else benefits?

The poor definitely benefit. The poor would not have otherwise got loans, since the larger banks cannot take such risks as giving loans to the poor, since the fundamental premise of larger banks is that of collaterals, and the poor do not have collaterals. The poor hence with the help of the microfinancing group get the money and many times expertise too, invest the money in small enterprises, and grow the money. So over time, the poor become richer than what they originally were, despite the higher rates of interest they had to pay in the process.

Now let us look fairly at the concept of IPO of microfinancing.

The microfinancier sees the benefit of the business of microfinancing, not just to himself, but to the poor at large, and he feels the economic pressures to grow this business, so he can benefit more and thereby many more poor can benefit more. So he decides to involve more people who have capital to invest in microfinancing, which is his business. And he says, what better way than an IPO to involve a large set of rich people - lock stock and barrel. The rich look at it again as an investment of their money, and of course with a desirable side effect of each of them getting a brighter halo for their indirect benevolence to the poor. Nothing wrong with that too.

Now when the rich invest in an IPO, they expect competitive returns. Hence the pressure on the business, here the microfinancing company, comes now from the market. As long as the economics of the interest rate with the available large capital, spread out across a now possible large market works, everything is fine. The problem happens when the investors' greed increases and that thereby forces the microfinancing company to charge a higher interest rate on its target population, and the pressures on the poor for repayment corresponsingly increases, thereby lesser tolerance to delinquency in repayment, thereby having to employ recovery agents, who again need to get paid. Then this goes against the original fundamentals in which the company started, and also goes outside the original economic environment, thereby the poor start committing suicides again. The government then is forced to intervene, not again out of love for the poor and because of a higher moral standing, but for their own economics of vote banks. The government thereby offers protection to the poor, introduces new schemes for the poor, and the poor withdraw from the original microfinancing company who now went IPO and shift now to government schemes, the IPO returns diminish, the microfinancier becomes a failure, the government becomes popular, they get re-elected by the poor, then get under the influence of the lobby which had still financed the large part of the campaign, starts investing in other pro-rich areas, and hence the money and generosity to the poor has to be withdrawn. The poor then suffer again, then another well meaning microfinancier comes, sees benefit to the poor, then feels why not raise larger capital to serve larger masses of poor and also grow his business, thinks of an IPO and launches an IPO. A new generation starts debating on the morality of the IPO, while the economics of morality continues to turn in its sensible pace.