The Microcredit Scam

20 February by Nathan Legrand


The following text is a slightly adapted version from a presentation given at the 8th CADTM South Asia workshop (Colombo, Sri Lanka, 18-19 February 2020).

 Microcredit: A Success Story?

Muhammad Yunus

In its modern form, microcredit has supposedly been invented in the South Asian region (Bangladesh) by Muhammad Yunus, who founded the Grameen Bank in 1976. His aim has never been to challenge the economic and social structures at the roots of inequalities. His official aim is to “lift people out of poverty” by making them all entrepreneurs. We argue that his real aim is the same as for any other capitalist company: to make the highest possible profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. on the short-term, whatever the consequences of their activity may be. Indeed, Muhammad Yunus’s own wealth is estimated to be at least US$10 million – he may not be a billionaire, but making US$10 million on the back of the poorest while claiming to help them is an impressive feat!

The core idea of microfinance is that traditional banking institutions do not lend to poor people because the risk of non-payment by the debtor is too high. Therefore, the poor are condemned to stay poor. Microfinance specializes in lending relatively small amounts to poor people, arguing that this will allow them to launch their own economic activity, become entrepreneurs and get out of poverty.

This objective is not actually met by microfinance.

However, microfinance soon proved to be a very profitable sector for the microfinance institutions, because the repayment rates are high thanks to abusive methods which will be described below. Microfinance institutions spread to the whole world (in particular in the Global South) and multiplied over the last 40 years: it became a really attractive business for capitalist companies, including for traditional banking institutions which started opening branches specialized in microcredit.

In a big part, this success was made due to the very active promotion of microfinance by the main actors of so-called “development policies” including governments of the Global North, so-called “philanthropic” billionaires (an oxymoron!) such as Bill Gates, and first and foremost by the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

. For some years now, “financial inclusion” has been a keyword of the World Bank’s agenda: the idea is that the poor populations need to be connected to the global financialized economy in order to get out of poverty – this means that they have to get loans, and if possible to get some other kinds of financial products or bank accounts. For instance, the last few years have seen the development of microloans to buy access to water and sanitation, microloans for education, microloans for health care services and, last but not least, the emergence of mobile finance – getting access to microcredit (and/or some kind of a bank account) very easily through a smartphone App. With financial inclusion as the main item on the World Bank’s agenda, microfinance has benefitted from a wide positive coverage: Muhammad Yunus and his Grameen Bank were awarded the Nobel Peace Prize in 2006, while the number of so-called “development NGOs” specializing on microcredit multiplied.

 The Microdebt Trap

In reality, most of the loans are not meant to launch a new activity, but are consumer loans to pay for rent, food and other consumer goods, education, health care. Indeed, microfinance agencies target the poorest and most vulnerable: when in desperate need, it is easily understandable that one mostly focuses on day-to-day survival, not on long-term plans of entrepreneurship.

As they target the most vulnerable, microloans are mostly taken by women (more than 80% of microloan borrowers in 2014 were women), and in particular by widows and single mothers, in areas that have often been hit by disasters that affect the whole community – for example in the North of Sri Lanka which has been destroyed by the civil war (1983-2009) and which is also a region affected by drought.

The conditions of the loans are abusive: the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
generally start around 20%, which is much higher than in traditional banking schemes, and they are mostly situated between 30 and 60% in many countries. A few years ago in Sri Lanka, it was calculated that a woman had to pay 220% annual interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates on her loan. This is possible because the interest rates are often not clearly announced – microfinance agencies simply announce the amount that will have to be paid by the debtor at each due date. Agencies also lend money to people who cannot read. The borrowers are asked to start repaying the loan after the first month, sometimes after the first week – even if the money was used to actually start a business, what activity could possibly generate enough money to start repaying after one week?

Microfinance agencies use various methods to ensure the repayment of the loans. Mostly, they will harass the borrowers by sending debt collectors to their houses. Debt collectors can use threats as well as verbal, physical and sexual violence. Another way of ensuring the repayment of the loan is by creating a form of collective responsibility: microloans can be given by microfinance agencies to individuals gathered in groups of around 20 people, where the default of one would have consequences for the rest of the group, so that the pressure to repay is higher for the borrowers.

As a consequence of the high interest rates and of the necessity to start repaying quickly, microcredit borrowers often end up in a debt trap: they have to borrow multiple microloans to repay the previous ones. When they cannot borrow from microfinance agencies anymore, because those agencies exchange information with each other, microcredit victims turn to loan sharks and get informal loans – this truly is a bitter irony since one of the promises of microcredit was to get rid of loan sharks.

There are multiple examples of women or households not eating in order to save money to repay the loans, or taking kids out of school so that they can work and earn money to repay. When they finally cannot repay one or the other creditor, debtors find themselves in a dire situation. As a consequence, their houses can be taken by the microfinance agencies, or their lands if they have any. There are multiple stories of people disappearing from their villages in order to go and hide in city suburbs. Others commit suicide. More often than not, the consequences of microfinance are truly dramatic.

 Possible Ways Forward

For movements of resistance against microcredit to emerge, the first step is for borrowers to realize that they are not alone and for them to come together. This is not easy because microfinance agencies do everything they can to make sure that the borrowers stay isolated and ashamed of struggling to repay their debts.

Once they have come together, microcredit victims can fight collectively and try to establish alternative credit schemes based on solidarity.

One such alternative is the “tontine” which exists in some West African communities: women come together and put the same amount of money at the disposal of the group. Then a woman of the group can borrow this money for the particular needs she has at the moment – for instance getting health care for a member of the family – and pay it back to the group of trusting fellow women without having to pay interests.

In Morocco, a movement of women victims of microcredit emerged in 2011-2012. These women, finding that they had been pushed to sign the microloan contracts without being aware of the – abusive – terms and conditions attached to it, decided collectively to stop repaying their loans. While a lonely debtor deciding to stop repaying is made vulnerable, when a critical mass of debtors decide to stop repaying their loans, it is the creditor that can be made vulnerable.

In the North of Sri Lanka, a movement of thousands of women started challenging the abusive methods of microfinance agencies in 2018. After drawing attention to their case, the government of Sri Lanka had to intervene to cancel some debts and start regulating the sector of microfinance. For sure, the debt write-off was limited and took the shape of a bail-out for microfinance agencies concerned, while the interest cap that was put in place is still very high (35%, after an initial promise of a 30% cap). Nonetheless, this was a partial victory that should encourage resistance to microcredit to go forward.

While these alternatives can genuinely improve the life of microcredit victims, they are not enough. What the problem of private indebtedness and poverty actually reveals is a structural problem of the societies we live in. Public services are being underfunded, slashed and privatized, resulting in people having pay to have access to education and health care. The economy is based on a handful of capitalists that are not interested in producing goods to satisfy everyone’s needs, but that seek maximum short-term profit, which can be achieved through cuts in wages, the development of precarious work without any employment contract, the existence of an important number of unemployed people to make sure that there will always be someone ready to accept a job even if the wage is extremely low and the conditions are extremely bad, and so on. Capitalism also maintains and increases profits by destroying the environment, therefore destroying the livelihoods of many local communities who are then forced to move and/or find new livelihoods, however inadequate this may be for them.

Therefore, if we want to tackle the issue of microfinance and private indebtedness on the long term, we have to tackle the structures that maintain and reproduce poverty and inequalities. We have to fight for decent jobs and for the right of workers and the communities they live in to decide about the production. We have to fight for a public system of health care, education and housing, for a public banking system that will distribute credit according to the common interest and not in order to maximize the profits of the banks’ shareholders. We have to fight against patriarchy which maintains women in a permanent state of precariousness and vulnerability which, among other things, pushes them into the hands of microfinance. We have to fight against the violent politics that destroy communities and livelihoods: any kind of racism, religious fundamentalism, hateful communalism, as well as armed conflicts in the benefit of capitalist and imperialist rule. We have to fight against the ecological catastrophe that threatens the possibility of a decent life, and that threatens the possibility of life itself in particular in the most vulnerable communities. Just like public debt, private debt is part of a broader capitalist system that needs to be overthrown and replaced with a global socialist, ecologist, feminist society.



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