The distribution of capital, along with other fundamental resource allocations, is central in the evolution of economic interactions from the ubiquitus power centric model of today to a network methodology that meets emerging requirements of the Global village.
Large credit markets, on which so many of our economic interactions rely, demand critical mass of information and duplicate transactions to support profitable arrangements (http://ideas.repec.org/p/sef/csefwp/36.html ) (Jappelli and Pagano 2000). These credit markets, however, do not address the real needs of the majority of the world's economy. The markets serve, in many respects, the economies of the past. Thus, as we depart from old way and head toward solutions that will support the new , the creation of solutions that arrange resources appropriately in light of Global economic realities is essential. There is evidence of a revolution in credit markets that reinforces this thinking. As the poorest among us gain access to resources, they will further push the rate of change and thus available capital in the emerging third world is a good sign for continued upheaval ahead.
Such is the power of microlending, a form of finance that is helping to eradicate poverty in countries all over the world. In rural India, for example, a loan of $50 can spell the difference between poverty and economic self-sufficiency for an entire family. Vinod Khosla, founding CEO of Sun Microsystems and a partner at the venture capital firm Kleiner Perkins, calls it "one of the most important economic phenomena since the advent of capitalism and Adam Smith."
Speaking at the Global Business and Global Poverty conference at Stanford Graduate School of Business, Khosla used the Indian organization SHARE Micro Finance Limited to illustrate microfinance. SHARE targets rural women in India whose per capita income is less than $8 a month—well below the World Bank poverty line of $30 a month. The organization lends each woman $50 to $100 to fund entrepreneurial projects proposed by the recipients. For example, a woman might open a market tea stall or small grocery or buy a rickshaw or bicycle to transport the wheat grown by her family to market. The rickshaw would allow her family to retain 50 percent of the profits from the wheat that would have gone to pay another transporter. On the high-tech end, some women have opened Internet kiosks that have become profitable within the first three months and have provided a livable wage within six months. "There are hundreds of examples like this," Khosla said.
In what Khosla calls a "virtuous pyramid scheme," SHARE lends money to eight-member women's groups. Because they are all part of the same community, the group members are under strong social pressure not to default. "It's embarrassing to default, and if one person does, the others have to make up for it," he said.
Critics argue that lending money in $50 increments is uneconomical and will lead to even greater burdens for the poor. The success of the more than 6,000 institutions doing some form of microfinance today has proven this wrong, said Khosla. "The phenomenon can draw economic resources on a worldwide and competitive basis," he said. Khosla urged listeners to join in the movement to remove regulations currently prohibiting microfinance organizations from obtaining necessary credit. Addressing the question of whether interest rates of 20 to 30 percent are usurious, he said: "Would you rather have no loan, or an interest rate of 25 percent? The alternative is a local money lender who charges 5 to 10 percent per day. So let's be pragmatic, let's get beyond superficial, ethical dilemmas."