Elementary Capitalism

by Chavi

I was doing some research on whether or not microcrdit, lending small dollar amounts to very poor people,  is a profitable business model. Then I found this:

A report called “The State of Microcredit” from CGAP (Consultative Group to Assist the Poor) covering profitability among other topics, states as follows:

Further breakdown reveals a wide gap between private and public providers. Of the clients of private providers, both NGOs and licensed institutions, over three fifths are being served profitably. The corresponding fraction for governmental providers is only one eighth.

In other words, government microcredit programs are rarely profitable, as opposed to privately-owned providers. The report then gives two reasons for this.

In the first place, profitable credit administration requires screening out borrowers who are not likely to repay, charging interest rates high enough to cover costs, and responding vigorously to late payments—all of which run counter to the practical incentives of even the sincerest working politician. Secondly, government institutions can often keep access to funding even if they are unprofitable.

The first reason is because of the second.  There’s no need to create an efficient business model when you have an unlimited supply of money.

This is elementary economics and supports the standard capitalism argument. I was excited to find an example spelled out so obviously at a time when the basics of capitalism are being openly challenged.

I wonder what what the difference in profitability is between non and for-profit providers? According to the theory non-profits should be less profitable than a corporation working for its own benefit.