It seems that the global recession and the subsequent tight lending conditions are throwing up all sorts of opportunities for ‘alternative’ lending institutions in the wider economy. The radio programme ‘From Our Own Correspondent’ (bbc) (see podcast FOOC) reported on one group benefiting handsomely from the current turmoil – the Italian mafia. The report comes from Naples, a bustling southern Italian city that sits below the famous and picturesque Mt. Vesuvius – infamous for the people in Pompeii. Of late, the southern mafia (camorra) have never had it so good. Due to the credit drought in Europe, the Italian mafia’s lending activities, have earned them an estimated $200 billion profit this last year – 6% of the country’s GDP.
In the cited example, a businessman needed a 50,000 Euro loan. In the current climate, it would take around 6 months for such a request. From the camorra he received it within 24 hours – albeit in a plastic bag. For this particular loan, they set an interest rate of 4.5% per month with dire consequences if repayment rates are not 100%. They would receive visits from ‘loan officers’ – men sporting fine Italian suits. The study named ‘Crime’s Hold on Business’ (by Confesercenti a small business grouping) mentioned that 180,000 enterprises have turned to the mafia for loans this past year. Further, they estimated that about 150,000 shopkeepers pay the pizzo, or protection money, accumulating the mafia $7 billion a year. It would be interesting to see the methodology of the report and how they got their numbers – unfortunately I can’t find the report online – probably the mafia’s doing…
Nevertheless, to relate this to microfinance, it could be interesting to think about how economic conditions change the prevalence of credit suppliers in the marketplace. Or we could think about the agent’s choice between the flailing traditional lending institutions and the readily available sources of elicit credit. In the microfinance world we might compare the MFI interest rate to the local moneylender and the respective repayment schedules, to determine the efficacy of the decision. The opportunity cost in Naples seems a little different. Despite the threat of swimming with the fishes, businesses are far happier to take the easy money than deal with the difficulties of obtaining formal credit in the current climate. Either this is an indication of the operational efficiencies and the vast market share of camorra or the state of banking sector in Italy – probably a combination of the two. In India the financial downturn and the recent attacks in Mumbai are likely to limit credit further. If the events in Naples are anything to go by, small MFIs may have a tough time and the more informal moneylending institutions might see their business pick up.
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