Microfinance in Moldova

I ate lunch yesterday with an American, Mike, who is working with a small microfinance company here in Chisinau. He was hired for a six-month term to help create a strong company via process improvement, team building, organizational development, etc. It was very interesting to learn from him about this industry here.

Micro-lending is exactly what it sounds like…simply providing access to capital on a small scale, typically for individuals to get resources to start or expand a business. Mike said there are about 50 such firms here (which seems like a lot for a population of approximately 3 million), and these firms are not like banks in terms of how they invest.

Mike’s firm primarily lends to individuals working in the agricultural sector (many with mom-and-pop gardens or small plots of land), and the lending process is interesting because they do not yet have a credit rating system as we do in the US. So, individuals seeking a loan must put references on their application as well as have a co-borrower. Mike told me that the loan officers must check with the references and simply ask whether the borrower is a trustworthy person, if they owe anyone money, do they go to church, are they in good standing in their community, etc. It sounds a lot like rural community banking in the US a few decades ago.

Most of those seeking these micro-loans are trying to sustain their small business of growing and selling fruits and vegetables at a market (and not necessarily selling to a wholesaler), and Mike said it seems that most are not likely to grow their business in a significant way. This begs the question: what is the goal of the loans, in the long-run, for these borrowers?

Micro-lending is a very big and growing industry around the world, and it has done much to provide capital at reasonable interest rates to individuals who are trying to make it, yet I wonder about the long-run effect on economic development. Not that it will hinder development, but here in Moldova, Mike’s firm in particular is simply providing capital to small family growers that appear to be on a simple path of sustainability.

The broad goal of micro-lending is to bring in poorer borrowers who don’t have access to capital, which will then generate economic growth from those borrowers. The effects are said to be direct (purchasing capital equipment or services), indirect (use of those dollars downstream by vendors or others), and induced (overall spending of a region increases because overall earned income rises). It would be interesting to study what the impact of micro-lending is here in Moldova, because some studies indicate that micro-lending in certain regions generates a doubling of the dollar-lending impact (or a multiplier of two). Thus, every dollar lent to local businesses spurs about two dollars in economic activity. The problem though with this type of analysis is that it is very difficult in a developing country where the data are much harder to come by. It may be that this sort of impact is more likely to occur in a developed county where micro-lending is also very prominent.

This is another research project that would be interesting to dive into…