19 March, 2024

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Microfinance Institutions Rake In Billions Through Unprofessional Practices

By Mithula Guganeshan

Mithula Guganeshan

Mithula Guganeshan

Financial institution’s high-rise buildings with magnificent bill boards trying to portray an image of success and trust is an awfully common sight in Sri Lanka. In the meantime while the financial institutions basks in glory, 84% of Sri Lankan’s are either financially struggling or suffering according to the survey done by Gallup Healthways in 2014.

An ex-employee from a financial institution located in Jaffna says “We offered loans even when we doubted about the repayment capacity of the customer due to the high competition from other players in the region”. He states only around 5% of the customers were able to settle the loan and interest repayments without difficulty on time, whilst the remaining 95% are struggling. The ex-loan officer mentioned that he resigned from his job due to the guilt associated with engaging in work misleading and trapping people into debt in order to meet the sales target set by the financial institution.

Debt levels are shooting up within different segments of the society ending up as victims to opportunistic strategies designed by financial service providers “selling happiness and freedom”

Imbalanced information

Financial institution are shrewdly exploiting and benefiting from the existing information asymmetry. Bankers chose not to reveal certain important information to their customers. Most of us would have had the experience of being taken aback some of the financial institution’s gimmicks in the form of extra charges, late payment fees and extra charges even when one decides to settle the loan early. Some banks even charges fees for closing bank accounts, well the excuse was to recover the set up costs even when the account was closed, after 15 years of use.

Financial institutions have been able to get their way with everyone from educated and financially literate customers to the poor and uneducated.

Microfinance institution’s exists to empower the poor or the financial institutions?

90% of microfinance loan borrowers are women according to information published on Lanka Microfinance Practitioner’s Association. Around 77 microfinance institutions are registered with the organization, however only 26 MFI’s have provided data thus, compromising a loan portfolio of 7.4 billion rupees. Microfinance loan portfolio is even higher as the data provided does not compromise information on other large MFI players posting profit in billions. [If microfinance institutions are so effectively working towards stimulating production and alleviating poverty, it is impossible for MFI’s to earn profit in billions?]

Mainstream media’s silence

Mainstream media could easily contribute towards creating awareness about the unethical practices used by the financial institutions. However, the number of financial institutions advertisements on the papers, TV’s and radio channels would validate why media chooses to hide the elephant in the room. Ironically, majority of the content published about financial institutions is in the form of a paid advertisement about products/services and the number of meaningless awards won by each financial institution.

Advertising extravagance by the financial institutions is to mask the truth about the core functions of modern banking system “encourage and misguide financially illiterate customers to get into unnecessary and excessive debts”

Discriminate poor women with unprofessional business practices

Women with low income from low – access areas are targeted as they have limited exposure to formal finance, have fewer options with limited awareness and knowledge etc. Most importantly these excessive loans are obtained by people for their day to day consumption thus; the borrowed money is hardly being used for any economically viable activity resulting in difficulties to repay.

Technically, microfinance is promoted amongst the poorest people as it’s recognized as a medium to reduce poverty (lack of evidence on countries that alleviated poverty with loans) by engaging in small businesses and gaining an income. Only a small % of women are able to invest the money into businesses and earn whilst the others have used it for consumption. Poor, uneducated women earning low wages are handed with easy credit at high interest rates with the excuse of empowering women. Even though the microfinance may charge lower than loan sharks, the MFI’s still charge high interest rates from those borrowing to survive on a daily basis. For example for a micro loan of Rs.25, 000, weekly payment of Rs.1000 for 10 months needs to be paid which results in an interest rate of over 50%.

The women spend the money and are looking for alternative options to repay when the agent arrives for weekly/monthly payments through pawning jewels and taking additional loan to repay. In the past, Sri Lankan women possessed golden jewels as a symbol reflecting their wealth; however the recent trend is women claiming about the amounts of debts that they hold.

Lack of regulation accommodate financial institution’s unprofessional business practices

The irregularities within the microfinance system in Sri Lanka that needs to be stopped/ regulated immediately to benefit the people

  • Door-door aggressive sales/marketing of the microfinance loans
  • Employing women to increase customers, without payment
  • Unregulated and high interest rates
  • Inadequate documentation, the sales personnel refuses to provide any document/contracts
  • Lack of understanding and awareness about the total cost that they eventually need to incur. Overcharges are included.
  • Deceptive advertisements and complicated terms (If the borrower request for information, the inadequately trained staff are not able to answer and says that they don’t need to know as these loans are offered by reputed banks/institutions)
  • Consumers don’t have a proper channel to complain about the issues and errors faced, majority doesn’t even know that they have the right to complain
  • Savings are lost in group loans, if the other party defaults their payments
  • Subject to insult, abuse and humiliation when the staff arrives at their homes every month to collect payments.

Excessive marketing by financial service providers

Financial institutions in general are engaging in excessive and aggressive marketing of their products. MFI institutions employ (without payment/salary) women within the low access communities, those bringing customers from the neighborhood are compensated with easy access to credit and leasing opportunities.

Quite similar to banks forcefully promoting credit facilities even when the customer is not actively looking for such options. Most of us had faced an incident where bank officers called us repeatedly to desperately push off an unnecessary credit card. Unprofessional business practices are common in the financial sector, and not limited to microfinance institutions.

Urgent need for financial consumer protection

Financial system is a complex and sophisticated system, rarely understood by ordinary citizens. It is unacceptable to expect that financially illiterates are expected to be aware and vigilant from the malpractice used by the financial institutions. Interestingly, despite the rising debt levels there is a lack of crucial and proper regulations to provide the people with financial consumer protection. Regulation is compulsory to bridge the information imbalance between the consumers and the financial institutions.

Sri Lanka only has a general consumer protection law without any explicit reference to financial services. The financial institutions are growing richer and powerful by the day at the expense of the people. Government’s efforts are directed towards providing more access to credit within the rural areas, instead of protecting the consumer’s rights. There are talks on funding with foreign money to facilitate the need to set up rural branches.

Officials could have different agenda; however, if people’s welfare is a priority first protects the citizens from the financial institutions. At this moment, the country needs immediate regulations in place to provide financial consumer protection before taking measures to prepare for additional loans.

Enough loopholes in the legal system to benefit the institutions and wealthy

Commercially focused business and social focused businesses have entirely two different objectives. There needs to be clear boundaries that commercially focused businesses should not target the vulnerable segments, without a clear set of laws and legislations.

If microfinance is an avenue to uplift the poor then the terms and conditions need to be favorable to the poor. Currently, microfinance is used to enormously uplift the CEO’s and directors of MFI’s while poor get the crumbs left.

Way forward

However, to stop the growing inequality, we are in desperate need for financial education and financial consumer protection for the long term stability of the financial system and the people.

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Latest comments

  • 5
    6

    This usually happens during UNP ( capitalist ) Governments where private sector borrowing in encouraged and unscrupulous ( read ALL) lending institutions got to town trapping people for life !

    Indeed proper education and safeguards are essential .

    • 2
      0

      RUBBISH
      HAPPENS ANYTIME ANYWHERE.
      NOTHING NEW OR CONFINED TO SRI LANKA.
      IT IS UPTO PEOPLE NOT TO FALL FOR THESE FALSE PROMISES.

  • 7
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    Prospecting the poor as entrepreneurs, especially through microfinance, is by far the most popular approach to peddling economic prosperity. Ask Dr. Harsha De Siva or Rohan Samarajiva and they will confirm this!

    What, then, is microfinance?

    Microfinance refers to programmes that extend small loans to poor people for self-employment projects that generate income. The following criteria can also be used to define microfinance:

    size : loans are micro, or very small in size
    target users : micro-businesses and low-income households
    utilization : the use of funds – for income generation, and business development, but also for community use (health/education) etc.

    Microfinance is the extension of small loans to those who are too poor to qualify for traditional bank loans. It has become a popular measure in the battle against poverty, enabling those without access to lending institutions to borrow at bank rates, and start small businesses.

    The key implications of microfinance are in the name itself: ‘micro’. A number of issues come to mind when ‘micro’ is considered: The small size of the loans made, small size of savings made, the smaller frequency of loans, shorter repayment periods and amounts, the micro/local level of activities, the community-based immediacy of microfinance etc.

    With the current explosion of interest on microfinance issues, several developmental objectives have come to be associated with it, besides that of only “finance”. Of particular importance is savings – as an end in itself, and as a guarantee for loans. Microfinance has been used as an ‘inducer’ in many other community development activities and used as an entry point in a community organizing programmes.

    History

    Microfinance has been practiced at various times in modern history. Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries. In the mid-1800s, Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty. Microfinance was included in portions of the Marshall Plan at the end of World War II.

    Microfinance: the Grameen Way

    In its most recent incarnation, with attention paid by economists and politicians worldwide, microfinance can be linked to several organizations starting in Bangladesh, especially the Grameen Bank in the 1970s and onward, for which its founder Muhammad Yunus was awarded the Nobel Peace Prize.

    In that country, it has enabled impoverished people to engage in self-employment projects that allow them to generate an income and, in some cases, begin to build wealth. Due to this success of microfinance, some in the traditional banking industry have begun to realize that these microfinance borrowers should more correctly be categorized as pre-bankable. The United Nations declared 2005 the International Year of Microcredit.

    Grameen Bank is best known for its system of solidarity lending by lending credit to the impoverished without requiring collateral. The system of this bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. Another distinctive feature of the bank’s credit programme is that a significant majority of its borrowers are women.

    The Bank also incorporates a set of values embodied in Bangladesh by the Sixteen Decisions. At every branch of Grameen Bank the borrowers recite these Decisions and vow to follow them. As a result of the Sixteen Decisions, Grameen borrowers have been encouraged to adopt certain social habits. One such habit includes educating children by sending them to school. This in turn helps bring about social change, and educate the next generation.

    Solidarity lending is a cornerstone of the Grameen way. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into a repayment problem. There is no form of joint liability, i.e. group members are not obliged to pay on behalf of a defaulting member. However, in practice the group members often contribute the defaulted amount with an intention of collecting the money from the defaulted member at a later time. Such behaviour is facilitated by Grameen’s policy of not extending any further credit to a group in which a member defaults.

    There is no legal instrument (no written contract) between Grameen Bank and its borrowers, the system works based on trust. To supplement the lending, Grameen Bank also requires the borrowing members to save very small amounts regularly in a number of funds like an emergency fund, group fund etc. These savings help serve as an insurance against contingencies.

    In a country in which few women may take out loans from large commercial banks, Grameen has focused on women borrowers; 97% of its members are women. While a World Bank study has concluded that women’s access to microfinance empowers them through greater access to resources and control over decision making, some others argue that the relationship between microfinance and women-empowerment is less straight-forward. In other areas, Grameen’s track record has also been notable, with very high payback rates—over 98 percent. However, according to the Wall Street Journal, a fifth of the bank’s loans were more than a year overdue in 2001. Grameen claims that more than half of its borrowers in Bangladesh (close to 50 million) have risen out of acute poverty thanks to their loan, as measured by such standards as having all children of school age in school, all household members eating three meals a day, a sanitary toilet, a rainproof house, clean drinking water and the ability to repay a 300 taka-a-week (around 4 USD) loan.

    Village Phone Programme

    Among many different applications of microfinance by the bank, one is the Village Phone programme, through which women entrepreneurs can start a business providing wireless payphone service in rural areas of Bangladesh. This programme earned the bank the 2004 Petersburg Prize worth of EUR 100,000/-, for its contribution of Technology to Development. In the press release announcing the prize, the Development Gateway Foundation noted that through this programme:

    …Grameen has created a new class of women entrepreneurs who have raised themselves from poverty. Moreover, it has improved the livelihoods of farmers and others who are provided access to critical market information and lifeline communications previously unattainable in some 28,000 villages of Bangladesh. More than 55,000 phones are currently in operation, with more than 80 million people benefiting from access to market information, news from relatives, and more.

    In the developed world

    Microfinance is not only provided in poor countries, but also in one of the world’s richest countries, the United States, where 37 million people (12.6%) live below the poverty line. Among other organizations that provide microloans in the United States, Grameen Bank started their operation in New York in April 2008. According to economist Jonathan Morduch of New York University, microloans have less appeal in the United States, because people think it too difficult to escape poverty through private enterprise. The distaste for the joint liability requirement may also be another factor as to why solidarity lending in developed countries have generally not succeeded although there are some notable exceptions.

    Criticism: Microfinance produces micro-results

    Throughout the late eighties and nineties, in the verbal currency of first-world do-gooders, microfinance became one of those magically fungible words, like sustainable, and embedded in a thousand NGO annual reports. What could be more virtuous in terms of prudent philanthropy than giving very small loans to very poor women? “If we can come up with a system which allows everybody access to credit while ensuring excellent repayment – I can give you a guarantee that poverty will not last long,” proclaimed Muhammad Yunus, guru to market partisans seeking “new solutions” to poverty. Yunus has found a rapt audience in international development circles with his approach to poverty – one that doesn’t involve old-fashioned ideas of expensive government programmes, tiresome training, or clunky infrastructure. Instead, Yunus, an economist educated in the United States, is calling on the goodness of “social-consciousness-driven entrepreneurs” and pushing “home-based production by the self-employed masses.” This translates as moving the responsibility for antipoverty programmes to poor people themselves, using borrowed money – and not only in the Third World, but in rich countries such as the United States as well.

    In the Grameen model, “landless women in Bangladesh, the poorest of the poor” are miraculously transformed into businesswomen – with enterprises so small they are tagged with the prefix “micro.” Rather than job creation, education, or training, the Yunus solution focuses on jump-starting self-employment, providing the capital for poor women to use their innate “survival skills” to pull themselves out of poverty. Instead of collateral, these “microloans” are secured by the honour and credit lines of a peer group: If one woman defaults, no one in her lending circle will receive another loan.

    This model has sparked a movement to dismantle development initiatives and decentralize antipoverty programmes with the ultimate privatization of welfare – shoeless women lifting themselves up by their bootstraps. According to the glowing press churned out of the Grameen’s Dhaka headquarters, which has been re-circulated uncritically in both the popular and professional press, it seems to be working. After all, what other bank lending solely to poor people can claim a 97% repayment rate, and a borrowing clientele that is 94% female?

    Poverty alleviation?

    But while the press and the global network of localists rave about the bank’s lending to “landless” women, the miracle dissolves on closer inspection. For example, Grameen rules insist that its borrowers own their homes – like the assumption that shoeless women have bootstraps. Evidently Bangladeshi homeless women don’t count as the poorest of the poor. And unfortunately, Grameen borrowers are staying poor. After many years of borrowing, a large number of Grameen households still aren’t able to meet their basic nutritional needs – so many women are using their loans to buy food rather than invest in business. That’s a figure that the press fails to mention. Ditto the World Bank, which in its 1995 study of Grameen, focused mainly on the bank’s financial viability, determining if the programme was breaking even or, better yet, turning a profit. It’s not; unfortunately, only foreign grants are keeping it afloat.

    Yunus himself lustily defends his vision of for-profit lending to the poor. In his words, capitalism doesn’t have to be the “handmaiden of the rich”; even poor people can benefit from the system if they are only given the chance to use their innate business savvy. But even though part of his mission is to graduate lenders into commercial banking, and the World Bank sees lenders’ graduation a sign of the programme’s viability, that’s just not happening. According to the World Bank report, “The [Grameen] Bank may have a market niche because its borrowers are dependent on the programme, but over the long run this relationship could render the Grameen Bank vulnerable. Unless borrowers’ graduation from low-level incomes to higher levels (if not from the programme entirely) is encouraged or achieved many members will become permanently dependent on Grameen Bank credit and services.” The same study found that Grameen had no significant impact on women’s wages in rural villages, although it did boost men’s and children’s wages. And with all the hype about Grameen being the largest micro-lending program in the world, one could never guess that loans to women have remained a mere 5% of the total amount lent in the Bangladeshi countryside since the 1980s.

    Gendered credit

    Proponents of Grameen-style micro-lending argue that even despite their flaws these programmes benefit and even “empower” women. But in a study published in World Development, Anne Marie Goetz and Rina Sen Gupta found that while women are getting the loans from Grameen Bank and similar organizations, a “significant portion” of those loans are directly invested by male relatives (although women bear the liability for repayment), and in only 37% of the cases had women retained full or significant control over the businesses that were in their names. In comparison, 22% of those they surveyed didn’t know how their husbands, sons, fathers or brothers had used the loan and had not even been involved in “their” enterprises. At Grameen, daughters of women borrowers are not eligible for a loan because the bank has a policy against making two loans to a family, even though a borrower can take out additional loans for her son’s business. So much for the “empowerment” of women.

    Instead of empowering women, it looks more like Grameen is using them as collection agents. As a Bangladeshi government field worker explained to Goetz and Gupta: “We are much better at getting our loan money back now that we are using women as middle-men [sic].” Even the western development literature is guilty of painting women as the sole moral and financial guardians of the family. Grameen’s high repayment rate is commonly explained by saying that men gamble the money away while women are more responsible, trustworthy, and concerned about the family. These explanations rarely note the pressure that poor, illiterate women must feel from Grameen’s highly educated, primarily male staff, nor do they examine what leads men to behave so irresponsibly, if this is indeed the case. Under the banner of liberation, Grameen ironically reinforces women’s traditional roles; while capitalizing household activities, women are kept out of waged work – which, whatever its limitations, can offer women some degree of independence. As Goetz and Gupta put it, using women as “conduits for credit for the family” keeps women as the “policers of recalcitrant men,” dubious progress in gender relations.

    Several outside studies of Grameen confirm that the control women have over their microloans decreases over time – just the opposite effect one would expect from programmes meant to promote women as entrepreneurs. Grameen’s social interventions have less to do with empowering women than with making them good repeat borrowers. At every meeting women rather cultishly recite the “16 decisions” that they must adhere to in order to be Grameen borrowers including, “We shall reduce our expenses to a minimum” and “If we learn that discipline is not respected . . . we go along to help and restore order.”

    Grameen might be better at generating media attention, but their services seem Spartan compared to those of the other microfinance programs in Southeast Asia. Grameen, believing women are able to provide for themselves all other inputs necessary to be effective entrepreneurs, provides only credit. On the other hand, India’s Self-Employed Women’s Association, a union for poor women, offers credit as one of a range of services, along with political organizing, training, business skills, leadership skills, mediation, lobbying and project assistance. The Bangladesh Rural Action Committee provides education for the daughters of borrowers as well as health services. But the Grameen model of banking on the poor is strictly quantifiable – “repayment rates,” “cost effectiveness” (i.e., how much it costs rich creditors and donors) and “viability.” Without the cumbersome delivery of the other services that the poor need, Grameen gets to champion the free-market system and all its goodness.

    Yunus has announced that Grameen is working with the government to replace the nationalized health care system with a sort of poor person’s HMO on a “cost recovery” basis. Of course, in the experimental programmes, Grameen borrowers were rewarded for borrowing money with lower premiums for health coverage. This fits with the World Bank’s recommendation that Grameen develop new markets and products for poor people. If adopted by the Bangladeshi government, the Grameen-run HMOs would create a two-tiered health care system – with families in hock to Grameen getting cheaper care.

    Grameen-style lending elsewhere in the Third World, promoted by the World Bank, isn’t scoring any great successes. In Zimbabwe, Patrick Bond pointed out in an article in African Agenda, loans to peasants had a default rate of 80%. Bond quoted Ugandan economist Dani Nabudere as saying that the notion that the rural poor need credit to improve their lives “has to be repudiated for what it is – a big lie!” But the rhetorical appeal of self-help obfuscates the failures of group lending to do anything for the African poor.

    Import model

    Now, disciples of Yunus in the United States are bringing the Grameen religion to the American public. Even Hillary Clinton claims that microfinance “translates to hope for women who dream of better lives. Its impact is gigantic.” Everybody, it seems, wants to jump aboard the microbus. The can-do enthusiasm of targeting the poor meshes nicely with the shredding of the social safety net, so the applicability in the United States of the peer-lending model for small, informal businesses is never questioned. Microfinance fits in nicely with prevailing prejudices in the United States, since it relies on local, rather than national, programmes and individual, rather than collective, approaches.

    But the notion that microfinance lending could seriously reduce poverty in the United States is ludicrous. Women’s World Banking, a microfinance coalition based in New York, highlights the success of microfinance with stories of a newspaper journalist turned doll maker, a low-income mother of four who paints children’s faces and murals, and a lower middle class woman who opens a gourmet coffee shop. While there is nothing wrong with what these women are doing, these activities are highly dependent upon consumer trends and personal income levels and would be severely hurt by a downturn in the economy.

    Beyond the vulnerability of these new businesses is the issue of how right they are – that is, is it right that programmes are encouraging women and the poor to take these kinds of low-paying, albeit self-paid, jobs? Debra Franklin, President of Planned Financial Concepts and a micro-lender-to-be, gushed about one potential client’s plan to buy cans from homeless people at half-price. Behind the chic rhetoric of flexibility and decentralization, there is an exploitative feel to many of these programmes. Yunus’s vision of moving mass production out from under one factory roof into home-based self-employment sounds frighteningly like a return to 19th-century-style piecework. And when there’s no transformation of production, wordplay can do miraculous work; for example, maids with microloans suddenly become micro-entrepreneurs with their own “cleaning service” when they are given some micro-credit to buy a broomstick and a dustpan!

    What the micro-revolution has failed to address in its manifestos for credit to be considered a human right is that more people in the U.S. are having to work at more than one job to stay above the poverty line. Rather than working to increase wages, the micro-liberals are clamouring to cut job training for the poor because that’s what has allegedly worked in Bangladesh. Turning peasant women into mini-capitalists is just furthering the reach of finance capital and shifting the burden of risk to a class who already bear the brunt of poverty without safety nets. And playing cheerleader to dead-end consumerism and self-exploitation strengthens the arguments of the slash-and-burn policy crowd as they cut public programs and replace them with the rhetoric of credit-fuelled self-empowerment.

    Since some individuals have been helped by microfinance, their individual cases form a powerful body of rhetoric that plays into the myth of America itself – work hard and make it. Now the micro-lenders promise the destitute they can “borrow our money and be your own boss.” Sounds like one of those late-night TV pitch for instant wealth in the United States through no-money-down real estate – and just about as believable.

    Micro-entrepreneurship?

    The term “entrepreneur” means “one who takes into hand” in French. It was introduced two centuries ago by the French philosopher Jean-Baptiste Say to characterize a special economic actor–not someone who simply opens a business, but someone who “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” The twentieth-century growth economist Joseph A. Schumpeter took this concept even further by characterizing the entrepreneur as the source of the “creative destruction” necessary for major advances.

    A client of microfinance may be an entrepreneur in the literal sense: she or he raises the capital, manages the business, and is the residual claimant of the earnings. However, the current usage of the word “entrepreneur,” as described above, requires more than the literal definition. Entrepreneurship is the engine of Joseph Schumpeter’s dynamism of “creative destruction.” An entrepreneur is a person of vision and creativity who converts a new idea into a successful innovation, into a new business model. Some clients of microfinance are certainly true entrepreneurs, and have created thriving businesses – these are the heart-warming anecdotes. However, the vast majority of microfinance clients are caught in subsistence activities with no prospect of becoming entrepreneurs. The self-employed poor usually have no specialized skills and often practice multiple occupations. Many of these businesses operate at too small a scale. The median business operated by the poor has no paid staff; most of these businesses have very few assets as well. With low skills, little capital, and no scale economies, these businesses operate in arenas with low entry barriers and too much competition; they have low productivity and lead to meagre earnings that cannot lift their owners out of poverty. There is little evidence to support that the poor are resilient and creative entrepreneurs.

    This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be true entrepreneurs. Even in developed countries with higher levels of education and infrastructure, about 90% of the labour force are employees rather than entrepreneurs. Even with greater availability of financial services in developed countries, only a small fraction has used credit for entrepreneurial purposes. Most clients of microfinance are not micro-entrepreneurs by choice and would gladly take a factory job at reasonable wages if possible. We should not romanticize the poor as “creative and resilient entrepreneurs.” The International Labour Organization (ILO) uses a more appropriate term: “own account workers.”

    Has microfinance become a macro-racket?

    The trouble is that microfinance loans don’t make any sort of a macro-difference. They have helped some poor women, no doubt about it. But in their own way they’re a register of defeat. Back in the early 1970s there were huge plans afoot to change the entire relationship of the Third to the First World, to speed Third World economies towards decent living standards for the many, not just the few. At the United Nations radical economists were hard at work drafting plans for a New World Economic Order. All that went out the window and here are the caring classes thirty years later, hailing microfinance.

    Microfinance loans are band-aids in a scale of things today where – to take the example of India – well over 100,000 farmers, including a large number of women, have killed themselves because their federal and state governments, plus large international institutions, have promoted the savage priorities of neo-liberalism. Bangladesh and Bolivia are two countries widely recognized for having the most successful microfinance programmes in the world. They also remain two of the poorest countries in the world.

    Against this backdrop, what have microloans achieved? Microfinance can be a legitimate tool in certain conditions, as long as it is not elevated into a gigantic weapon. No one was ever liberated by being placed in debt. That said, a lot of poor women have eased their lives by using microfinance, bypassing bank bureaucracies and money lenders.

    But today the World Bank and the IMF, along with state-owned and commercial banks are diving into microfinance. The microfinance business is fast becoming a gigantic empire, bringing back into control the very banks and bureaucracies women have been trying to bypass. Microfinance is becoming a macro-racket.

    The interest rates micro-indebted women are paying are far higher than commercial bank lending rates. They are paying between 24 and 36 per cent on loans for productive expenditures while an upper class person can finance the purchase of a Mercedes at 12 to 20 percent from the banking system.

    The average loan of the Grameen bank is USD 130 in Bangladesh, lower in India. Now, the basic problem of the poor in both countries is landlessness, lack of assets. In the Indian province of Andhra Pradesh, where there are thousands of microloan groups, land costs 100,000 rupees an acre, poor land maybe 60,000 rupees–over USD 2000. USD 130 doesn’t buy you the land, not even a good cow or buffalo. So how many poor women have escaped the poverty trap in Andhra Pradesh? Try getting an answer.

    With that USD 130 the most basic assets do not come to the women. The amount is tiny. Interest rates are high and the default sanctions savage. During the floods in Andhra Pradesh in 2006, freelance journalists came to a village where everything had been washed away. The first people back in were the micro-creditors threatening women, demanding monthly instalments from women who had lost everything.

    The idea that microfinance allows its recipients to graduate from poverty to entrepreneurship is inflated. The dynamics of microfinance is such that it emerges that the clients with the most experience got started using their own resources, and though they have not progressed very far — they cannot because the market is just too limited — they have enough turnover to keep buying and selling, and probably would have with or without the microfinance. For them the loans are often diverted to consumption since they can use the relatively large lump sum of the loan, a luxury they do not come by in their daily turnover. Definitely, microfinance has not done what the majority of microfinance enthusiasts claim it can do — function as capital aimed at increasing the returns to a business activity.

    And so the great microfinance paradox is that the poorest people can do little productive with the credit, and the ones who can do the most with it are those who don’t really need microfinance, but larger amounts with different (often longer) credit terms.

    In other words, microfinance is a great tool as a survival strategy, but it is not the key to development, which involves not only massive capital-intensive, state-directed investments to build industries but also an assault on the structures of inequality such as concentrated land ownership that systematically deprive the poor of resources to escape poverty. Microfinance schemes end up coexisting with these entrenched structures, serving as a safety net for people excluded and marginalized by them, but not transforming them.

    Governments like microloans because they allow them to abdicate their most basic responsibilities to poor citizens. Microloans make the market a god.

    Let’s suppose USAID or some kindred agency decides to put USD 10 million into microloans. What used to be an initiative of a group of women at the village level, has become a high-profile, international funding activity. Long before the first rupee is seen by women in a village, NGOs, consultants, bank managers and their relatives have all taken their cut. By the time the loan gets to the women in the village the cost is prohibitive, with the very poor and women of low caste often excluded. On top of this, some revolving-fund models require each woman to put a few rupees a day into the fund. But often women don’t have a rupee a day, so they go to the local moneylender to be able to repay the microloan.

    Microfinance lending can be a useful tool but it should not be romanticized as some sort of transformational activity. On that plane it’s useless. By contrast, the East Asian economies, like South Korea and Taiwan, relied on massive publicly-subsidized credit programmes to support manufacturing and exports. They are now approaching Western European living standards. Poor countries now need to adapt the East Asian macro-credit model to promote not simply exports, but land reform, marketing cooperatives, a functioning infrastructure, and most of all, decent jobs. Countries that have lifted people out of poverty have not done it through microfinance; it’s been through the development of larger enterprises which create jobs – for example, in places like China and Vietnam. The question is: ‘Could we not use the resources in a better way?’ – for example, creating community farms rather than creating individual entrepreneurs by giving them each a loan to buy a goat.

    The trouble with publicly-subsidized credit programs is that they’re public and they’re large and run contrary to the neoliberal creed. That’s why Muhammad Yunus got his Nobel Prize, whereas radical land reformers get a bullet in the back of the head!

    A summary of the failings of microfinance

    1. Microfinance does not aid development but is only a survival tool.

    2. Development requires massive capital, state-directed investments. Microfinance schemes coexist with these entrenched structures, and serve as a safety net for people excluded and marginalized by them. It does not transform them.

    3. Microfinance has so far managed to barely keep people above subsistence level. Poor borrowers take only small, conservative loans aimed at protecting their subsistence and do not go for anything higher, like investing in new technology or hiring of labour.
    4. To the poorest, the high interest rates hardly give them enough chance of success. Though it is much lower than what unorganized money lenders charge, the fact remains that if they can’t earn more than their investment they will become poorer.

    Conclusion

    Microfinance often yields non-economic benefits for its clients, such as increased self-esteem, social cohesion and empowering women. It also helps the poor to smooth consumption over periods of cyclical or unexpected crisis. However, that is not enough; the key issue is whether microfinance helps eradicate poverty. The Economist magazine concluded that while “heart-warming case studies abound, rigorous empirical analyses are rare.” A few studies have even found that micro-credit has worsened poverty; poor households simply become poorer through the additional burden of debt. The reality seems to be far less attractive than the promise.

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    I am a General Manager of a Micro Credit Company in Colombo and am aware of the unethical practices of MFI’s. The writer appears to be knowing the background of Micro Finance and Micro finance Institutions in Sri Lanka. Most of the MFI’s are managed by unprofessional without sufficient knowledge in MF. Field Officers and Collecting Agents speak with women in uncivilized manner. Some institutions claimed to be selling ‘happiness and peace of mind and financial freedom to uplift the rural community and empower women”, they hardly do so. What most MFI’s want is profit and more profit. The writer has very authoritatively stated many facts which is happening every day with MFI clients who are mostly un-educated women and young girls and senior citizens. It is time the regulators open their eyes and bring in laws to curtail unethical practices.

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    Thanks for the great article giving the pros and cons of micro-finance loans.

    It certainly did work in Bangladesh. Guess that government was more socialist driven, and many are Egalitarian prone (possibly because of the Islamic base).

    Didn’t work in India, as the Hindu caste system makes it impossible for any possible socialistic drive to give the masses that safety net. Their present capitalistic trend further exacerbates the situation.

    Might or mightn’t work in Sri Lanka. Trouble is Elite (of all races), hob-nob too much with each other, and only with each other. Then, there are the aspiring Elites that base their lives on becoming Elite. Different stratus of society are too cut off from each other. Elite work not with the finances of the country, but with the finances of the greater Western nations. Very little national tax is collected for the lower rungs of society to function decently. Safety nets then cannot be put into place to protect the masses and ensure that their micro finances work properly for them.

    Sri Lanka financial structure tends to work like the US. The difference is that the US is about 33% below poverty line. US therefore scorns the micro-finance structure because their 67% masses can well do without it. Sri Lanka is 84% below poverty line.
    In Sri Lanka, 5% Elite together with another 11% aspiring elite, will make use of the 84% Masses, to prop up their wealth. This is quite unlike America, which is the country of invention and innovation for the world, thus selling their products world-wide and creating and maintain their monetary system. This then create jobs for the American public.

    Elite of Sri Lanka, on the other hand, is merely about installing the American inventions on Sri Lankan grounds, and using the Masses to work for them, whilst all the while living a first-world lifestyle on third-world grounds. Whenever the Masses try to start their own enterprise, it is crushed down by first-world commercial trade, education, and social-being, that crushes them out. Lankan government is continually aspiring for first world grounds, where the 84% Masses, forced to succumb to 16% lifestyle, is soon to become a non-essential competent of Lankan society.

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    All are working towards target , profits,& goals.No one is concerned about customers/people. Sincerearity is fading away while people are searching for trusted partners. Let us be sincere Bankers and enjoy the work and also have job saisfaction.
    Arun Beadle

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    I agree with most of practical issues discussed in the article. But I see that the author does not see that there are MFIs doing the work in a very responsible manner with an visible impact also in the country.

    I would like to speak to the author. I request the author to contact me.

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