Are Microloans Really A Good Thing?
Welcome to the fourth part of our series of conversations with the International Blockchain Monetary Reserve’s Managing Director, Sinjin David Jung. Today we’ve got a doozy! We’re going to do a deep dive into the economic systems that drive the economies of Southeast Asia with a specific focus on the area of microfinance. Financing is one of the biggest stumbling blocks for entrepreneurs anywhere. Finding the capital for even a small business can be difficult. Yet there has been exponential growth in the number of small and medium enterprises (SME) in the Southeast Asia region, which on the surface seems outstanding, right? Small businesses after all are the backbone of any economy, but just how these SMEs get their capital can play a huge role in their success or failure. We’ll take a deeper look into the practice of microloans and compare it with a potential alternative solution, the microasset. And finally, we’ll end on a fascinating discussion about productivity and how productivity shapes equality and what kind of production may actually be best suited for our society.
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ERIC: Why don’t we go over the terms microloan versus microassets? Tell me what a microloan is. Tell me what a microasset is.
SINJIN: Okay. So in the field of microfinance, a microloan, in emerging or developing markets, is basically a short term loan. It can be either for a month or two weeks or eight months. And it’s for a small amount. It’s for an amount that normally you would never get a loan for in a developed country. Anywhere between a hundred dollars up to a thousand or even two thousand. And so what this has done has allowed for people who are doing very labor intensive jobs that require them to buy some amount of raw materials, like having a laundry service or a recycling service or trash pickup service, to have enough cash flow to take care of overhead costs for themselves and to make their businesses more efficient. And what has happened is that these microloans have actually, you know, made a lot of these smaller, very urban type of survival jobs workable in terms of the cash flow and it has actually helped kick start and stabilize the business.
The downside is that for the people who administer these loans, the overhead is quite large… for the loan officer, the accounting system, so on and so forth. So normally if you have that structure in a bank, it’s fine, because the loans are anywhere between five, ten, twenty, a hundred thousand dollars and up. So one person doing one of these loan documents, the interest that they receive from it can be 5%, 8%, 12%, and over the annualized interest rate, and it works, it pays the person’s salary, pays the banking overhead, the buildings, the accounting, and so on. But when you’re doing loans for $200, $800, then you need to do a greater number of these loans. Let’s say, you know, this one loan officer has to do 20 of these loans a month. And so those 20 loans actually may not even be able to really pay for the loan officer’s salary at that particular level. And so what inevitably happens is that the interest rate on these loans is quite high. And how high are we talking? We’re talking 30 to 60% annualized returns for the interest! And the thing about it is people have no choice but to accept these loan terms. Number one is because they can’t really get loans. Number two is that these are better than loan sharks, right? Where they don’t have doubling interest.
And so the microloans, they definitely fill in a gap, but the problem is because the interest rate is fundamentally really high. And the way that they ensure that people repay is that sometimes they get kind of communities that come in and do a community loan and divvy it up. And so if you’re not paying your thing back, you get social pressure. So one good point about microloans has been that the repayment rate has been very high because in actuality, let’s say that I loan out $60 for the month and I get $6 back that’s 10%. Okay. 10% annualized is something like more than 200%, right. We call annualized interest, right. But because it’s just $6 on 60 after a month. And at that particular level, in terms of the absolute numbers, it doesn’t seem that bad. But the long term effect is that when you have to pay 30 to 60% interest, then it’s hard to scale up your business.
So it’s good to stabilize your business. But if any real company in a developed world was paying 60% interest on their money every year…
ERIC: They would never be able to make money.
SINJIN: They would never be able to make money. Yeah. It would totally eat up their margin. And even if they were able to break even, or even eke out a good standard of living for them, just themselves, the problem is they can’t expand or grow the business. And a lot of these businesses are like this. And so for us, the solution has been the creation of this thing called a microasset.
ERIC: So how prevalent then are microloans in the economies of Southeast Asia? How many, what percentage of businesses would you say or estimate or guess are using microloans?
SINJIN: I would say in any developing country microloans are basically the most prevalent form of assistance right now in developing countries, especially for the urban working poor, who are, you know, doing any type of work. It is humongous. It’s the only way for any of these people to get like a loan, that’s not a loan shark loan, right. And if you’re aware of what happens in you know, emerging markets, you know, there are pawn shops, there are money lenders everywhere because cash is basically in very, very short supply, whether someone got sick or whether it’s school fees or whether it’s uniforms for schools, people are always buying and lending each other money.
And in some ways for business, the microloans are definitely godsends. And it’s an indispensable tool. That being said, on a really negative side is that when you apply microlending broadly it’s actually giving microloans to people who really won’t benefit from microloans in the long term. And it’s actually making their lives more difficult. And what I mean to say, is that if they didn’t have the microloans, they would be in a worse position, but microloans giving it to them, doesn’t actually make their position a lot better either, because now they’re on this constant stress and they’re still not really progressing. So what I want to say is that microloans are not bad. They’re just not good enough. And so, you know, and it’s easy to throw the first set of criticism out there on this. If there wasn’t another solution that you could say, well, here it is, we’ve assessed this issue.
It’s not as good as people say it is. And if we left it at that, I would say, you know, that’s just not constructive at all. I mean, when this has been, when this has done so much good, then you have to like follow up on that. This has done so much good, but here is something better. And then that’s where we get to with our concept of the microasset.
ERIC: Okay. Tell me about microassets.
SINJIN: Okay. Well, first and foremost, I think we’re the first ones who are kind of pegging this term and pegging this concept. And the reason for that is because an asset is something that you purchase or you buy that can generate returns over time. The problem is that when you are, when you basically just have cash, whether it’s $5, $10, $20, $30, there’s really nothing you can buy that will generate interest or some kind of revenue for you, or appreciation at five, ten dollars.
So imagine this, you’re living in the urban working slums, you have $10. Okay. What could you conceivably buy for $10? That could be an asset. I mean, you could buy lemonade, lemons, and sugar and make lemonade. Okay. That’s not an asset, that’s a business. Okay. And then you’re going to be left with, you spent $10 and you made $20 in cash. Okay. Then you made $20 in cash. You did it again. You made another $10 in cash and you made $10 a day. Okay. But still, even if you got to $200, tell me something you could buy that would appreciate in a consistent way that you could, you know, get dividends or create a credit history or a financial track record off of? Nothing. Cause if you took that $200 and then you put it in the bank, and then suddenly now you are financially included in the banking system, anytime that you wanted to access that money, you would be charged a dollar. The interest that you would get in a checking account? Assuming that you still needed access to it, it would be 0.02%. it’s not even 1%, it’s not even 2%. It’s not even like 0.1%. It’s not even 0.2%. The bank really doesn’t care about this small balance in your checking account.
In America, they give you a minimum balance that you need to hold in your checking account or your savings account in order for them to waive the fees, right? So if it’s like $5,000 or $10,000, that’s kind of like the bare minimum where cash has any value to the bank at all. They can count it under their own reserves and then be able to lend money out against this amount that you hold in your bank account. So, if in the Western world, cash only has some kind of asset value at 5 to 10K, what do they do underneath those amounts? I mean, then it’s just cash, right? Then your only asset is not really an asset, but just liquid capital.
So for us, it was how can we create something at, you know, this range between 5 cents to a hundred dollars that could actually generate interest? Where the main benefits could be distributed to the urban working poor, and then you would help solve the main crux of the microloan problem.
In ‘Poor Economics,’ they had done a study where instead of giving people a microloan, they gave them two chickens and a pig or something like that, or two chickens and a cow or something, I can’t remember the exact thing, but they had actually given them an asset. And how’s an asset work? Okay, well, the chicken lays eggs. Or, the cows, after a couple of years or a couple of months, you know, it could be slaughtered or the pig could be slaughtered and you could get a sizable amount of money for that. And then you basically are getting debt-free capital. And what they found was that the debt-free capital actually has a much greater effect on their standard of living because now they have enough money and also long term security where they can scale their businesses.
They can invest it and scale it, right. Whether it’s in housing or education or whatever. And so the crux of ‘Poor Economics’ wasn’t necessarily about all the conclusions they made, it was the fact that, they said, okay, well, here are things that we accept as kind of truths within the developing economics framework. And let’s do controlled studies and see if that’s really the case. And one of the very controversial things that they uncovered was this aspect of assets versus microloans. But, you know, a lot of non government agencies, NGOs give out direct cash aid, but cash again, what do you do with that cash? You spend it. And if you don’t have cash flow coming in, like what an asset would do or a business would do, then the cash goes, and then it’s just done.
And a lot of these people don’t have enough financial literacy, but also they have a lot of pressing issues. Right? So when it comes down to it, we thought about how could we create our own microasset? And, you know, in some ways for us, we’re both an economic development, microfinance project, but we’re also a cryptocurrency. Really in that Fintech space. And through tokenization and also creating a decentralized network, we have developed a model which we feel aptly fulfills these microasset types of requirements. And I’ll give you one example is that we have our token, ARCC, and we are planning to give it out for free. Not necessarily free in terms of like, you can just have it if you want it. But it acts as an incentive for a decentralized information network.
And I won’t get into that right now, but essentially with ARCC, what can you do with it? Well, you can buy microstocks or microequities. And what we’ve done is, as a beta, is that we have bought, you know, $10,000 worth of high tech US stocks, and then we’ve tokenized it. So that one stock is divided into 10,000 increments. Okay? And then these individuals with ARCC will be able to buy these microassets. These microequities. Now, What’s a great thing about the stocks that we picked is they’re basically the FAANG stocks. They’re the high US tech stocks that are networked that have like network effects in them. Okay? Like Netflix, Google, Apple. We, we even included Tesla in there. Let’s say Tesla is at like something crazy right now, like $800. Okay. One 10,000th of Tesla is 8 cents. But, you know, some analysts are projecting it to go like $890. When we bought it, it was $720. So we’re looking at year to date from when we had bought it when it had been going up we had made something like 15% on it. Okay. Where in the world with 8 cents, can you make 15%?
Nowhere. No banks will give it to you. No, nothing like that. And because we’re on the blockchain protocol — we’re on the Algorand protocol — the infrastructure cost to create the asset, to do the tokenization, to exchange it is almost nothing. I mean, we’re not even paying any server costs or anything like that. I mean, for every transaction, yes, we pay pennies on the dollar for the transaction to Algorand to provide this network. But because we are based off a decentralized network, we can also provide access to these microequities with almost no overhead other than the initial development of the exchange and of the UX and things like that. Then, you know, we can really start to help people, even incrementally, start to build their own asset portfolio. And as they’re able to earn more ARCC, they’re able to earn more microequity.
This, over a period of like one or two years, may end up being $1,000 or $2,000 worth of debt free capital. And that’s what our goal is. Now there are more involved parts to this, but, you know, I don’t want to get into that because it gets into the technical. But that, in a nutshell, is what we have created in response to the microloans. This microasset and microequity.
ERIC: I’ve heard you mention this in the past, but you’ve talked about what is the best production for us as human beings. And I’d like to hear you elaborate on that a little bit more.
SINJIN: Okay. I’m going to try to do it without being, without going down the rabbit hole too much. But the model for IBMR is based on a lot of different models and more than anything else, we’re a strategic firm… we want to apply theory. And one of the theories and the models that we use is Ray Dalio. He has an understanding of the economy. And he has this really great video out there, like understanding the economy in 30 minutes or something. But of the two books he’s written, he basically talks about bringing it back down to what has worked for him, and then, you know, analyzing the Great Depression and also the different cycles, the credit debt cycles, the economy, etc. But it all comes down to why are we doing this?
Why are we investing? Why is capitalism the best for allocating capital, for what purpose? And, you know, we come back down to a very basic idea of, you know, productivity, you know when you were whether, I don’t know, 10,000 years ago, we were living in villages and we were all tribal and we were just trying to survive. We were not thinking about being productive. We were just thinking about like, how can we survive? And then we had farms and we had you know, castles and towns, and then, you know, this is pre industrialization. And we’re like, how can we be more productive to create more food? Obviously genetically modified foods solved that problem for us in the mid eighties. But at the heart of it is when we start talking about money and we’re talking about cryptocurrencies, everyone’s like, how does this money have any value? How does, you know any of this capital have any value, but we kind of all missed the point about productivity. I mean, the fact of the matter is… what the economy is and what we use technology for, is directly related to the type of productivity and production that we want to get out of society. And the point of it is right.
And so what we’re trying to do with ARCC, and with these microassets, is actually kind of looking towards creating an entirely new system. Not necessarily a disruptive system to the current system, ‘cause the current system, it does work, but it only works for X amount of people. We’re trying to create a new system that works for those people who are not already established with capital, who are the urban working poor, to organize them through a decentralized network by creating a new kind of production for them — where they get value from coordinating with each other and being incentivized to coordinate. And so it comes down to, I don’t want to give this kind of analogy in a kind of negative way, and I hope no one takes it this way, but you know, fire ants are hardcore. Say there’s a flood that comes along, right? And the entire colony gets wiped out and what do fire ants do? They actually bind together and they create a raft for themselves. They are amazingly resilient and powerful when they’re fully coordinated.
You can have all these schools of fish coordinating together as one large entity. Why do they do this? It’s not because there’s other schools of fish, its ‘cause there’s predators out there, Great White sharks. And if you think about the entire scheme of what the marketplace really is and who is creating all this production, you know, all this production is done by the Great White sharks. And the only way for the school of fish to survive is by coordinating.
It becomes a matter of survival for the poor because if we don’t do this then we just get stamped on individually and nobody cares. I mean like five fire ants versus against an elephant, there’s no way they win. But a thousand fire ants, maybe they have a fighting chance to win. And that’s what we’re kind of looking at in terms of production, in terms of money, you know.
The reality is, money is a way to incentivize modern economies for how they do their production, right? And how does that incentivize a decentralized network? And how does this decentralized network coordinate and organize itself so that it can bring together the urban working poor, who — there’s so many multi layers to this — but I think, you know, we keep an eye on the fact that the production isn’t working for the urban working poor. And in order to make it work for them is not a matter of hijacking or reforming the current system. Cause I think the current system creates inequality by its very nature of becoming more efficient. The answer is to create a parallel system that works for them.
Going back to like microloans. So I’ve been really, I didn’t want to like kind of criticize microloans as exploitative, but on the negative side of microloans, they are exploitative because you’re trying to take people who are not part of the established production system, who are not making $20 an hour and who have their own house in a good neighborhood where there’s public education and some level of public healthcare. You know, you’re not taking those kinds of people and giving them these microloans. You’re taking people who are not in that kind of situation, where they don’t have good medical benefits or any medical benefits at all! You know, they don’t have a stable income and then you’re forcing them to pay at the same level of interest, right? And then it becomes exploitative. Because they’re just basically working to pay off this really high interest rate. And if they didn’t work at all, they would basically be in the same standard of living. And in that sense, it’s exploitative.
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The International Blockchain Monetary Reserve is an economic development reserve established to promote inclusive financial development for the urban working poor in emerging markets. IBMR.io has just launched ARCC, the Asia Reserve Currency Coin. It’s the world’s first digital microasset. ARCC are debt free sources of capital for entrepreneurial investment, specifically allotted for the urban working poor, and are a new form of microfinance that exists outside of the established financial and credit systems.
