I also think that there is a role for grants in generating the funds necessary to continue helping the poorest borrowers and savers take baby steps towards establishing themselves as legitimate financial services consumers.That is Julia Brown over at the Women's Initiative, whose good post I recommend reading in full. She was responding to my earlier post arguing against subsidizing interest rates on microcredit in most cases.
Julia goes on to say:
Reaching the poorest of the poor, especially in rural areas, requires a great deal of overhead in terms of physically reaching the borrowers who may be widely scattered and maintaining the contact necessary to reduce default rates.I agree with Julia on the high overhead cost of reaching the poor in rural areas. I also agree that in some cases subsidizing this overhead may be a more cost-effective way of helping the poor than many other aid programs.
However, experience has shown that the best thing is to subsidize this overhead directly. Subsidizing interest rates tends to distort incentives at the margin, politicizing the loan process and masking the true cost of doing business.
In any case, thanks to Julia for a nice post.