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Microcredit’s Newest Victims

2011 January 4
by rahul

This story infuriated me:





Have you ever gotten a call from a collection agency? Remember how nasty it was? Now imagine that you’re an illiterate or semi-literate woman in a Third World country with little in the way of enforceable rights, and imagine how much worse the collection agency would treat you. Sadly, this is a large part of the activity of the much-heralded microlending sector, whose advent is supposed, according to Nobel laureate Muhammad Yunus, to “create a world without poverty.”

Unlike the well-known enterprises such as Yunus’s Grameen Bank, the lender in this case, Share Microfin (which is also under investigation for another suicide), is a for-profit company. The article, which is highly critical, goes on to blame these unfortunate outcomes on the commercialization of microfinance. People get into the business just to make money, some of the highest-profile companies have had relatively successful IPOs–Banco Compartamos SA in Mexico raised $467 million in its 2007 IPO and this last August, SKS Microfinance Ltd., India’s biggest microlender, raised Rs. 16.3 billion (about $365 million)–and the interests of investors diverge strongly from those of credit recipients.

Lakshmi Shyam-Sunder of the World Bank’s International Finance Corporation compares the situation with sub-prime lending in the United States, although the two seem rather different in that great numbers of sub-prime loans were made with minimal or no diligence on the question of whether the debtor was likely to be able to pay back the loan, whereas here the emphasis is on getting the loan paid back no matter what happens to the debtor. In the subprime case, the key was identifying profits with loan throughput, whereas here it seems simply to be single-minded focus on profit.

Yunus plays the role of the good guy in the article, explaining that “commercialization is the wrong direction” and that one should not seek exorbitant profits, limiting loan interest rates to “the cost of funds plus 10 percent.”

Superficially, it seems quite easy to blame such horrors on the corporate dedication to profit above all and to distinguish sharply non-profit from for-profit microlending–although it must be pointed out that Yunus’s attempt to separate them so sharply flies in the face of earlier pronouncements. His book touts “social business” as the key to the poverty-free world, starting off with the inspiring tale of creating a joint venture company with the Danone Group (parent of Dannon Yogurt).

In any case, this distinction obscures more fundamental problems. First, “nonprofit” is really a notional status. . Whether surpluses go into profits for shareholders or merely high salaries for top officers of the organization is a matter of bookkeeping. Nonprofits, especially when they get to a certain size, have pretty much the same emphasis on revenues as for-profits do.

They also can have very similar notions of labor discipline. I just read a fascinating article (pay wall–JSTOR) by Mokbul Morshed Ahmad that is based on ethnographic work conducted in 1998 and 1999 among employees of Bangladeshi microcredit organizations, which brought up a point that I hadn’t considered:

A leading advantage of microcredit programmes is that their ‘performance’ can easily be measured, which enables the NGO to demonstrate achievements and satisfy its donors. Now that development intervention is so much driven by ‘performance indicators’, this can be a decisive factor in its adoption.

It is not difficult to guess that one of the reasons microcredit is so popular with foundations is that it is so fundamentally built on the free market (and in particular on making the credit market for the poor a better market in the classical sense); what I had not realized is that it is also great because it allows for labor rationalization. Unlike a great deal of NGO work, microcredit seemingly provides an obvious and built-in metric for judging the work of individual field workers and of organizations. Two numbers–loan throughput and loan repayment rate–allow one to easily evaluate people’s work, fire the ones who don’t perform, and pressure others to constantly keep increasing their numbers (Grameen Bank, which was not one of those Ahmad studied, does not, according to Yunus, use total loan throughput for evaluation of workers).

An obvious result of this is that NGO workers (who are generally poor and easily replaceable) are pushed to hound debtors mercilessly. One of them tells Ahmad

When I lend money, I always keep pressure on my clients that they have to repay it by whatever means. I tell them that if you die without repaying my loan I will kick on your grave four times because you have not repaid the money.

This is unfortunately what it often comes to.

Microcredit seems to involve a number of perversities. The first, so common as to seem almost a tenet of neoliberal economics, is what economists call the “fallacy of composition.” Roughly, it states that it’s a big mistake to assume that, because a certain behavior is beneficial for an individual who does it, it will be beneficial if everybody does it. For example, if one person saves, that’s usually good for the person; if everybody saves, you have a recession or stagnant growth (unless you are driven by exports, like China). Or take the idea, incredibly prevalent in all “human capital” arguments that, if one person gets a better job because of more education, then if everybody gets more education all the bad jobs will be eliminated and only the good ones will remain. In truth, if everybody had a Ph.D., some people would be janitors with Ph.D.’s, some would be Starbucks baristas with Ph.D.’s, and so on. This should not be difficult to figure out, but nobody in the policy biz seems to figure it out.

Similarly, if a handful of people can have their lives changed by small loans that can help them start a business (and there is much anecdotal evidence to this effect), people like Bill Clinton and Muhammad Yunus like to suggest that, if all the poor get loans to start businesses maybe they’ll all be better off. In truth, if no structural changes are made in the economy, what you’ll have is far too many vegetable vendors, bicycle repairers, etc. competing with each other until they drive profits down to zero and nobody can keep up with their 20% interest payments (Grameen’s rule of thumb maximum interest rate for a business loan–other microlenders charge much higher rates). Just as with creating an “ownership society” in the United States, flooding Third World markets with excess credit, and pushing people to take loans that they don’t need or will have no good use for, will simply create a large number of people who are underwater. The same kinds of structural incentives that led mortgage lenders here to offer excess credit seem very likely to push microfinance in the same direction. This time, though, the catastrophes will come to people who have nothing to fall back on, not even the tenuous welfare state of the United States.

Even worse, perhaps, microcredit frequently relies on techniques that, if not coercive, are extremely close to it. It involves the provision of credit to people who simply wouldn’t get it otherwise. Many such projects collapsed quickly because of poor repayment. Grameen Bank succeeded because of a focus on lending to women and through invocation of collective responsibility and mutual surveillance. Loans were made to women in a “circle,” all of whom were made responsible for repayment of the entire amount, and they were encouraged to pressure each other to make their payments. To this was added, as Ahmad mentions, considerable pressure from field workers. The result is that, perversely, very often microcredit recipients have fewer rights than ordinary recipients. In the United States, any of us has the right to default on a loan. We can walk away, declare bankruptcy, or whatever. The sanction against doing so is that one loses one’s credit rating and getting future credit becomes very hard, but if the choice is between eating or repaying the loan, you default. Microcredit recipients, at least sometimes, don’t really have credit ratings and have little or no guaranteed access that they are going to lose. Microfinance organizations react to this fact by creating this choking atmosphere of social pressure, which often seems to make default more difficult than it is for the rest of us. People go hungry to pay back the loans, their kids drop out of school to work to repay the loans and sometimes, horribly, they kill themselves.

Despite these two fundamental problems, there are obviously things to be said for microcredit. It’s very difficult to find any systematic data on the effects of microcredit, one of the problems being the difficulty of defining and then finding a control group. As of the end of 2007, the World Bank said 157 million people had been served by microcredit–what is mentioned much less frequently is that likely the vast majority of those people are still poor. A recent study by Abhijit Banerjee, Esther Duflo (recent recipient of the John Bates Clark medal and of a Macarthur Foundation Fellowship for studying the economic lives of the Third World poor), Rachel Glennerster, and Cynthia Kinnan of MIT based on randomized trials in Hyderabad (randomization was by neighborhood, not by individual) found mixed results. There was no statistically significant impact of access to microcredit on measures of health, education, or women’s empowerment (although the trial period was only 15-18 months), but there was a significant increase in household expenditure on durable capital goods (for household businesses) and decrease on spending related to alcohol, tobacco, and gambling. Although significant, the effects were pretty small: per capita spending on durable capital goods went from Rs. 5 per month to Rs. 12 (this is out of roughly Rs. 1000 per month income). It’s possible to imagine that this tiny amount of capital accumulation will make a huge difference for families in the long run, but it’s also entirely possible that it will just mean more money sunk in an untenable business.

A study from the World Bank’s Consultative Group to Assist the Poor seems, on the other hand, to suggest that the main benefit the poor get from microfinance is what economists call “consumption smoothing.” Incomes of the poor are highly variable, as are expenses. Repairs, illness, school fees, etc. are frequently dealt with by short-term borrowing. Family, friends, and moneylenders are the traditional resort; microfinance corporations are more reliable sources of funds than family and friends, and less extortionate than moneylenders. This makes sense and is valuable. The poor need this sort of credit, not usually to get out of poverty, but to avoid catastrophe. The lower the interest rates charged by loan sharks, the better. Carrying a credit-card balance is better than taking out a payday loan. Indeed, this is just creating a more rational market; if you can make money charging the poor 30% interest, then it doesn’t make good free market sense that the only lenders are loan sharks who charge 100%. But to pretend that this is potentially transformative of the situation of the poor is absurd.

I’ve been aware of critiques of microfinance as a stalking horse for neoliberalism at least since I read this article in 1996. Market solutions like microfinance, many said, would just increase the pressure to dismantle state services of the kind that would really be needed to address the issues of poverty. This critique never bothered me all that much, for the simple reason that a great deal of it was happening in places like India or Bangladesh, with virtually nonexistent state social safety nets, or that it was beginning in places like the United States, where social services were going to be dramatically cut anyway. Had I known how gigantic the field would be, and how many bien pensant types would promote it as the killer app for world poverty, I might have thought differently. Even now, though, I think it is foolish to have a blanket position in opposition to free-market-type solutions. We will be dealing with markets for a long time to come, if not forever, and these things will be necessary. There’s nothing wrong with a carbon tax in a world where you can’t wave a magic wand and eliminate or drastically reduce carbon emissions. The problem is the incredibly sloppy thinking (also a defining characteristic of neoliberalism) that resists outlining the often restrictive scope conditions for such solutions and also resists serious thinking about the viability of non-market solutions, alone or in combination with market solutions.

I’m anything but an expert on the subject of microfinance, so if anyone can point me to any really good data on its actual effects on the poor, I will be grateful. I have no doubt that it’s done a lot of good; what seems very likely, however, is that any further expansion will do more harm than good.

5 Responses
  1. January 5, 2011

    Thanks for this. It is good to see a longer piece, and one that uses social science as you promised. I am definitely seeing at my workplace everything being pushed towards easier-to-measure activities, which creates biases in what we think about doing and inevitably leads to games and not progress. I am thinking specifically about peer-reviewed research and grades- and evaluations-based teaching. Of course, those who don’t like these trends are against progress, right? And trying to hide their own mediocrity… in order to have any credibility with a critique you have to first show that you are “excellent” by these measures. By that time, you’ve spent so much time and energy doing so that you’ve forgotten what the measures did to your brain in the first place, and everyone’s too busy cranking out the requisite quotas to listen to what you’re saying anyway. Season 4 of the Wire was interesting for that too, I thought: “Juking the stats” at school and in the police department.

    Microfinance too? Why wouldn’t it be, even though I hadn’t made the connection. It did always occur to me though that repayment rates by very poor people weren’t exactly a measure of uplift. There’s a Canadian philosopher named John Ralston Saul who argues that historical periods of prosperity in many societies followed massive defaults and nonrepayment of debts.

    My question for you though is, why do you “have no doubt that it’s done a lot of good”? I have exactly those doubts. Assessed relative to other uses of the same money? Such as, for example, just giving it away as grants? I think of both charity/philanthropy and microfinance as the purchase of control over poor people’s lives – at rates much cheaper than welfare, too.

  2. January 5, 2011

    Justin, when I say I’m sure it’s done good, I don’t mean relative to other possible uses of the money. But, first, it is the kind of idea that originally, at least, mobilized resources for the poor that wouldn’t have been mobilized anyway (also remember that the ideal is supposed to be that it pays for itself). Secondly, it’s hard to imagine that there are no individual poor people who were enabled to lift themselves out of poverty by use of microcredit. There are certainly enough testimonials out there. When it comes to the plight of the extreme poor, I have a real problem with those of us who are comfortable dismissing small changes because they are not large or not structural.

    Obviously, as the article I started with points out, there are anecdotes where microcredit has helped lead to ruin for poor people as well.

    About your last point, the idea of microfinance, esp. of Yunus and Grameen Bank, is very explicitly supposed to be that it breaks the mold of charitable control and empowers the poor directly. He makes a big deal of the fact that, for example, Grameen doesn’t tell you what business to start. Their motto is “We just have the money, but you (the poor) have the ideas.” I’m aware that it often doesn’t work out that way in practice, but I feel that the argument needs to be given a fair shake and also can only be evaluated by systematic, not anecdotal, use of data.

  3. Shelah Riggins permalink
    January 7, 2011


    You have done a service with your in-depth examination of microcredit. When I first learned of microcredit, it appealed to me, for it seemed to be an example of the effectiveness of altruism in practice.
    Alas, my illusions did not last long. I found that effective interest rate on many microfinance loans issued by non-profit microcredit institutions can approach 45%! This is justified on the basis of the need to protect against the risk of default, so as to make the system more attractive to prospective investors (in the West).
    Yes, I have seen the anecdotes of persons who have been lifted out of poverty and have been able to buy into the ownership classes of their respective societies. It seems to me that this folderol is intended to bolster the exploitation inherent in the microcredit model–regardless of whether the lender be for-profit, as mentioned in your article, or non-profit, like the Grameen Bank and
    For me, this raises two questions, both more theoretical than realistic:

    (1) Isn’t there a way to incorporate altruism without having to rely on the profit motive? The pie is finite, and, in the long run, we in the West are going to have to adjust–sooner or later–to the new reality that our slices need be smaller.

    (2) Has anyone advanced a workable concept for a post-capitalist regime? I know that capitalism’s defenders point to the profit motive as the driving force behind economic advances, business development and the propagation of new technologies. . . .on the other hand, the enormous toll capitalism has exacted on human societies and individuals, not to mention natural systems, would seem to relegate capitalism to “the dustbin of history!”

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