In chapter 7 of Poor Economics the authors main focus is on how when most poor micro businesses ask banks for loans they typically do not receive them and when they actually are given a loan, the banks charge them at high interest rates. But the author also focuses on how Micro Finance Institutions, through the use of microcredit, give the poor loans without charging them with absurdly high interest rates. This idea of microcredit does present some problems such as if the loans are not repaid the Micro Finance Institutions cannot continue to run.
The authors give an important statistic on page 158 when they translate how much a fruit and vegetable seller in India has to pay back to a wholesaler in terms of American dollars. They say if you borrow 100 rupees ($5.10 USD PPP) with an interest rate of 4.69%, after a year you would have to pay back 1,842,459,409 rupees ($93.5 million USD PPP). This was quite mind blowing to me that they charge the poor at such a high interest rate and one would think that this is why so much poverty persists in the world. To provide a counter to these high numbers the authors use the Micro Finance Institutions by saying how they allow buyers to purchase with cash instead of credit, which allows them to save a significant amount of money.
I learned a great deal from this chapter of Poor Economics. They presented many ideas that opened my eyes to why individuals are so poor and also as to why they are forced to pay such high interest rates. I also learned how the use of micro institutions can help the poor by giving them lower interest rates but at the same time cause many problems.
One question that came to mind after reading this chapter was how can the micro institutions create a plan that allows them to lower interest rates but at the same time make sure they are compensated for their loans?