Microcredit: The Failure of a Neo Liberal Myth?
The concept of microcredit – lending small amounts of money to impoverished people that would not be considered by traditional lending institutions to help them start their own business – appeared in the late 1970s in Bangladesh. Its inventor, Mohammed Yunus started lending money to Bangladeshi women to lift them out of extreme poverty by enabling them to become entrepreneurs. He created the Grameen Bank and was later awarded by the Nobel Peace Prize in 2006 for his work impulsing economic and social development from below.
Microcredit gained major international recognition from the 1990s onwards. Many saw it as the remedy to extreme poverty and the key to development in poor countries, in a neo liberal cultural context in which the only difference between American multi-billionaire Bill Gates and an Indian seamstress was thought to be the availability of capital. The entrepreneurial culture turned microcredit into much more than just a financial tool. It was believed to induce a deep transformation of societies, encouraging investments in education and health, reducing inequalities, creating better institutions. Helping countries to develop was not synonym charity anymore: the free market would do!
Most recently, microcredit became increasingly popular when the financial institution Compartamos, that started as a small NGO designed to micro-lend in Mexico, raised 458 million dollars during its introduction to stock markets in 2007. Not only is microcredit helping the poor, it also became extremely profitable. Starting then, the number of micro financing NGOs started multiplying. The market appears even more juicy when considering that a majority of people in developing countries are self-employed. They represent half of the active population in countries such as India, Pakistan and Nicaragua, a rate reaching 70% in Peru but only a mere 10 to 12% in most developed countries. In 2010, the number of people who contracted microcredits was estimated to be as high as 150 million across the planet.
Unfortunately, Yunus’s financial tool seems to have failed in inducing consistent change. Two scholars, Ha-Joon Chang and Milford Bateman, have underlined that microcredit institutions advertise themselves by the false premise to make the poor richer, whereas achieving wealth is very rarely the direct consequence of an individual effort but rather the product of a favorable entrepreneurial culture and environment (institutions, low corruption, functioning judicial system, etc). In that sense, many argue that unlocking funds for small business ideas in a majority of cases results in an overcrowding of the market on the offer side: since it requires few skills and little capital, the number of entrepreneurs selling the same umbrellas or of seamstresses on the same market multiply, thus making the business activity unprofitable. In most cases, micro-borrowers do not dream of themselves as the next Bill Gates but instead are self-employed by default and a majority will use the money borrowed as a means of survival rather than a life changing investment. Praised as a gender empowerment tool, women are in most cases borrowing to then give the money to a male figure in their family while still held accountable for the money and end up resorting to prostitution to pay off their husband´s or father´s debts.
Moreover, the interest rates can reach ridiculous figures, sometimes as high as 100%, due to the important risks of lending and the targeting of a population that most of the time does not dispose of any other alternative, and are blamed for pulling up the price of borrowing money in developing countries even from traditional lending institutions. Additionally, the high price of micro-borrowing makes it impossible to re-invest the profits and generate more wealth as they are generally dedicated to pay off the loan. Chang and Bateman further criticized that microcredit not only is inefficient but actually worsens the situation as it inhibits traditional actors, such as the state, NGOs or financial and international institutions, from helping reduce poverty, now dedicating resources to other purposes.
"Give a woman a microcredit loan to buy a fishing boat and the CEOs of the microfinance institutions and the microfinance investment funds will eat for a lifetime." Hugh Sinclair, author of Confessions of a Microfinance Heretic.
Besides, to a certain extent in the same fashion as the numerous credits offered to American households in precarious situation prior to the sub-prime crisis, micro credit exploits the incapacity of the poorest to say no when offered money and their inability to understand the terms and conditions, especially in countries where literacy and higher education remain limited. For instance, LAPO, a Nigerian based NGO specialized in microcredit supported by the Deutsche Bank, forbids its customers to spend all of the capital made available to them, presumably to teach them how to save – the customers end up paying fees and interests on money they will never even use. Many people have then sunk into a vicious circle of indebtedness, contracting new credits to pay off the previous ones. In Bosnia, it was estimated that 60% of the micro borrowers had contracted more than one loan, and almost 10% more than five. A housekeeper from a poor rural region of Morocco ended up contracting the equivalent of 900.000 euros of `micro´ credit, the equivalent of more than 300 years of earning the annual local minimum wage. And when unable to collect back the money, some of the microcredit institutions resort to shameful methods, such as threats, humiliations, harassment, sacking of homes. The burden of indebtedness resulted in a wave of hundreds of suicides in India in 2010.
Should we however blame microcredit for not being the neo liberal miracle we expected? Yunus, its inventor, affirms that we have to differentiate between the original concept and its abuses. It is nonetheless urgent to introduce more regulation, both on the side of the micro lender and the micro borrower. Interest rates should be capped and coherent with the customer´s activity and income (Yunus recommends an interest rate of 10 to 15% higher than the costs of raising the money). A tighter control of the micro lending institutions and the creation of organisms to support the process and provide the necessary tools, such as CRECER in Bolivia, are imperatively needed. Micro borrowers should be selected with care, differentiating between those who contract credits to survive and whose situation after having borrowed money is only likely to worsen and the others, who are more likely to benefit from a micro loan on the long term. Indeed, under tighter regulation and within the right framework, microcredit could still represent a useful tool when it comes to integrating a part of the population that is usually economically ostracized in countries and regions where the state remains a ghost.
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Bibliography:
To go further:
'Microcredit: comment se faire des perles avec la sueur des pauvres', Daniel Mermet sur France Inter, http://www.franceinter.fr/reecouter-diffusions/434627
Microfinance and the Illusion of Development: from Hubris to Nemesis in Thirty Years, Chang & Bateman, http://werdiscussion.worldeconomicsassociation.org/wp-content/uploads/Bateman-Chang-May-24-NH.pdf
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