This post is about another illustration of the "second-best" approach to development. Standard explanations of poverty elimination and economic development has blamed the local moneylender for exploiting the locals and perpetuating deprivation. The stereotype of the usurious practices of the moneylender are part of development folklore. However, such simple explanations tend to gloss over important issues.
The moneylender is part of the massive unorganized sector and his activities are therefore not registered and regulated. Accordingly, governments across the world have taken steps to ban the moneylender or develop alternative mechanisms like thrift activities through the Self Help Groups (SHGs). But the moneylender continues to be as ubiquitous and resilient as ever.
We cannot wish away the reality that access to timely and assured credit for the poor remains a major deficiency in many developing countries. With the formal credit mechanisms failing to reach out to these poor, the demand is being met by the moneylender. Given the huge area and large numbers, it is not practical for even the most aggressive "financial inclusion" campaign to bring all the uncovered under the formal banking net. All the presently available alternative credit delivery initiatives involving micro-finance are too limited and have negligible reach.
Any effort to remove or immobilize the activities of the moneylender, without having in place a working formal credit mechanism, will not only fail, but also adversely affect the poor for whose benefit these steps are taken. It will starve them of much needed credit. As long as the demand and incentives that created the moneylender remains, even if the government successfully manages to wish away the moneylender, some other informal version will certainly emerge to occupy the vacated space.
So the only pragmatic solution to the problem appears to lie in co-opting the moneylender and formally recognizing his presence. A practical regulatory framework can be created, which registers them and regulates their activities. The mere recognition of their presence may be enough to contain and significantly reduce some of the problems.