The problem with microfinance – is it a bad concept or a bad realization?

We’ve seen that development aid often brings more damage than help, some people blame the present governments, some the economy and as in every questioned sector, revolutionaries try to re-invent the system and to find new solutions. So did Muhammad Yunus, founder of the Grameen Bank in Bangladesh, who introduced a new concept to re-structure banking in favour of the poor.

The new aid instrument, called microfinance became very popular in the global North. [1] (Klas G., 2012) It’s trying to involve the uninvolved countries in the global economic system, to make them part of the market which determines our wealth and social structure. The idea of microfinance is to lend poor people a small amount of money at a relatively low interest rate in order to give them a chance to build their own independent business and to overcome poverty. [2] (Yunus M., 2012) [3] (Grameen Bank) [8] (Ledgerwood J., 1998)

working man

Through the last years many scandals related to microfinance had been shocking us, bad consequences of a good system which no one had seen coming. Indebtedness reached an extreme [1]:

“Tanda Srinivas was lounging in the yard of his two-room house in the southern Indian village of Mondrai shortly after noon on Oct. 28 when his wife, Shobha, burst out of the door covered in flames and screaming for help. The 30-year-old mother of two boys had poured 2 litters of kerosene on herself and lit a match. The couple had argued bitterly the day before over how they would repay multiple loans, including those from micro lenders who had lent small sums to dozens of villagers […] When Srinivas, 35, tried to snuff out the flames with a blanket, his polyester clothes caught fire. Within three days, both parents were dead, leaving their sons orphans.” (Bloomberg newsletter 28.12.2010)

This is only one of the horror stories that shocked the world in 2010 and questioned the concept of microfinance, whose results were suicides, increase of poverty and desperate families incapable to manage their debts.

Similar incidences happened in Bangladesh [4](Roodman D., 2011) and the Grameen Bank was under criticism ever since but are these happenings really the fault of the system or only of its application?

The Grameen Bank, which calls itself “Bank for the poor”, tries to reach the poorest of the poor, who aren’t considered credit-worthy by ordinary banks and offers them the opportunity of small loans for relatively low interest rates of 20-35%. [3][5](Anu M., 2009)[6](Biswas S., 2010) High compared to traditional banks, those interest rates are the only alternative for the poor, considering that the interest rates of local moneylenders (100-200%) are unbearable. [1] 

The Bank targets mostly poor women (97%), trying to empower by giving them financial independence. [3][5][7](Yoolim L. & Ruth D., 2010) But the result was unexpected, women ended up being even more dependent. Being forced to sell everything they have, in the worst cases their bodies, they become slaves of their own debts. This doesn’t only occur for women, distributing micro-credits is like selling dirty water to people who are dying of thirst. [1]

To help their customers, Grameen Bank set up a policy that they’d only offer credits to small groups of people. The idea was to guarantee for each other’s payback and to get strength in times of trouble, but even this concept has failed in many cases. [3][5] The pressure, which leads to tragedies like above, comes often from exactly these groups. If a group can’t repay its loan due to an accident or failed project, the bank isn’t that understanding and supporting anymore. [1]

The Grameen Bank was supposed to be a bank of the people, but is it? On paper, 95% of the bank “belongs” to the people (the rest to the government) [5] but the borrowers have no personal relation with the bank and often don’t even feel supported by the institution. The only side they see is the pressure of the money collectors. [6] The lack of transparency for the often-illiterate clients and the corruption hidden behind the walls of the bank destroys the sacred image of the welfare NGO.

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The financial intermediaries of the Grameen Bank work on a commission-basis and seem to urge people to accept microcredits. Debtors are mentally and physically threatened to payback and slowly pushed into debt-slavery. [1] NGOs have to find a balance between the customers who struggle to repay their debts and the investors who expect a profit from their investments. [7] As a result they often tend to the most powerful, the rich side. It appears that Yunus’ idea of a non-profit based “social business” [2], has been lost during the process.

“If […] you are not helping poor people’s lives, you are not patient. You are not restrained. You don’t have empathy for the people. You are just using them to make money. That’s what blinds you when you are in the profit-making world. We need to see the people, not profit.” (Muhammad Yunus, 2006)

Many of the social ideas behind the initial microfinance have been lost through time. Microfinance isn’t a solution for everyone but the suicides only represent the worst-case scenarios, they shouldn’t be ignored, neither should they darken the idea of aid. Despite its numerous negative aspects, microfinance can reduce a village’s poverty up to 40% and it’s been proven, that each year 5% of the borrowers cross the poverty line. The impact is higher on extreme poverty than on the general poverty but at least it changes something. [9](Khandker S.R., 2005) Some microfinancial institutions try to change the system to the better, by creating personal relations with customers, advising and supporting and by improving flexibility and transparency.

A program with such huge extent can’t be defined as good or bad.  Everyone needs his own time and way to develop. I am convinced that microfinance is a good initiative but needs to improve its application. Allowing us to help without intervening too much, it’s an opportunity for those who are willing, to emerge through their own strength.

References:

[1] Mikrokredite – Ethisch sauber? – Gerhard Klas (20.08.2012) RosaLuxNRW, Youtube [Online] (https://www.youtube.com/watch?v=sgIlGH0qBNw)

[2] A History of Microfinance – Muhammad Yunus (18.01.2012) TEDx Vienna, YouTube [Online] (https://www.youtube.com/watch?v=6UCuWxWiMaQ)

[3] Grameen Communications (1998) Grameen Bank – Bank for the poor [Online] Available from: http://www.grameen.com/index.php?option=com_content&task=view&id=16&Itemid=112

[4] Roodman David (21.11.2011) Microcredit Suicide Story out of Bangladesh, Center for global development [Online] http://www.cgdev.org/blog/microcredit-suicide-story-out-bangladesh

[5] Anu Muhammad (29.08.2009) Grameen and Microcredit: A tale of corporate success, Economic & Political Weekly [Online] p.35-42 special article, Available from: http://www.academia.edu/206069/Grameen_and_Microcredit_A_Tale_of_Corporate_Success

[6] Biswas Soutik (16.12.2010) India’s micro-finance suicide epidemic, BBC News [Online] Available from: http://www.bbc.co.uk/news/world-south-asia-11997571

[7] Yoolim Lee and Ruth David (28.12.2010) Suicides in India revealing how men made a mess of microcredit, Bloomberg News [Online] Available from: http://www.bloomberg.com/news/2010-12-28/suicides-among-borrowers-in-india-show-how-men-made-a-mess-of-microcredit.html

[8] Ledgerwood Joanna (1998) Microfinance Handbook: An Institutional and Financial Perspective [Online] World Bank Publications – Business & Economics, Available from: http://books.google.co.uk/books?hl=en&lr=&id=ciFt3kcRYGIC&oi=fnd&pg=PP1&dq=microfinance&ots=vWShciuzUj&sig=PPRmXoTxuGRhnQ5baK9uh1820fY#v=onepage&q=microfinance&f=false

[9] Khandker S.R. (2005) Microfinance and Poverty: Evidence Using Panel Data from Bangladesh – The World Bank Economic Review, Vol.19 No.02 [Online] Available from: http://www-ds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/05/23/000445729_20130523153641/Rendered/PDF/774910JRN020050ofinance0and0Poverty.pdf

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