The Disease Must Be Understood Before it Can Be Prevented

I am a man in love with analogies, and I could not resist one that involved the two issues most central to my professional life; the fight against malaria and the study of the coping mechanism used by financially distressed families.

In a recent post I rambled on incoherently about the relationship between last resort finance (short term loans from moneylenders, pawn shops, check cashing, pay day lending, etc.) and social networks. I suggested that the need for expensive, quickly accessible sources of financing was perhaps caused by a lack of social contacts (friends and family) one could borrow from.

Whether or not you believe moneylenders, check cashers, etc. are exploitative actors preying on the poor or helpful financial resources to those in need, I think we can all agree that it would be a better world if these borrowing sources faced extinction because of a lack of demand. Thus, perhaps preventative medicine could be a more effective tool against the evils of high interest rate short-term borrowing (and the debt cycles they often lead to) than trying to actually regulate the behavior of lenders.

Malaria is one of the world’s oldest diseases. It has likely been around since even before man. Yet the cause of the affliction was not known until the late 1870’s, and not truly understood until the very end of the 19th century. The idea that malaria was caused by a parasite, a tiny living organism that attacks blood cells, that came into the body through the saliva of a mosquito would have seemed insane to Ben Franklin* or Emperor Akbar. It was only after the process by which human being become infected by the malaria parasite that humans were able to attempt to prevent the disease. It has been a long and often discouraging battle, but through various preventative measures (including improved sanitation, DDT spray, the use of bed nets, and economic development) the burden of malaria in the world has been greatly reduced in the last century. Malaria does remain endemic to many parts of the world, but there are reasons to be optimistic about the future.

Curative medicine has and does still play an important role in the fight against malaria. Effective treatment is necessary for the unlucky, and as long as malaria exists, there will be a need to develop new and more effective medicines. But the majority of focus absolutely should lie in preventing the sickness, not in treating it.

It is now virtually entirely understood why people get malaria, and the public health world has come a long way in understanding the ways to prevent it. This leads me to think that if we better understand why some people find taking on high interest short-term loans, we might also be able to better prevent that malady as well.

Much of why people need to use high interest short term loans is known. One of the primary reasons people take out these types of loans are unexpected shocks. A common and obvious example would be the need to pay health expenditures. Another cause could be crop failure or another unexpected loss of income. If the people who encountered these shocks had a nest egg of savings, it might allow them to lessen the effect of the unanticipated events negative effects. Yet sadly it is exactly these people who often face a lack of available, liquid, easy to access savings facilities. Besides savings, there is of course insurance, another financial service that can be used to save people from the high interest rates and cycles of debt caused by last resort finance, but insurance programs for the poor and illiterate are notoriously difficult to implement.

Yet much of why people use high interest short term loans is not understood. CMF is currently part of an ongoing study that seeks to understand why some entrepreneurs are in perpetual debt. The study seeks to improve our understanding of why some entrepreneurs spend substantial portions of their income paying off the debt incurred from daily loans rather than building up working capital. It is exactly studies like these that may help us prevent seemingly wealth-diluting behaviors.

Does financial training cause people to save more and take on less short term high interest loans? Can microfinance institutions effectively distribute health or crop insurance to prevent their clients from having to go to moneylenders in dire circumstances? Does the formation of SHGs promote informal insurance within communities?

It truly is not all that different from fighting a disease. Only through research and innovation that leads to increased knowledge for the reasons people take on high interest short term loans will there come any chance of preventing it.

*Happy American Independence Day