Commercial credit historically has been unavailable to the very poor. Even if those living in poverty had access to a bank, without collateral it is hard to get credit from the traditional banking system. As Peruvian economist Hernando de Soto demonstrates in his path-breaking work, The Myatt), of Capital: Why Capitalism Triumphs in she West and Fails Everywhere Else, commercial credit is central to building a market economy.
Access to credit in the U.S. has allowed people of modest means to systematically build their equity and make major purchases, such as houses, cars, and education.
The vast majority of the poor in developing countries operate in the “informal” or extralegal economy, since the time and cost involved in securing legal title for their assets or incorporation of their micro enterprises is prohibitive. Developing countries have tried governmental subsidies to free the poor from the cycle of poverty, with little success. Even if the poor were able to benefit from government support to start small businesses, their dependence on credit from local moneylenders charging usurious rates makes it impossible to succeed.
Local moneylenders in Mumbai, India, charge interest rates of up to 20 percent per day. This means that a vegetable vendor who borrows Rs.100 ($2.08) in the morning must return Rs.120 ($2.50) in the evening.
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