A Note on Microfinance

There’s been a lot of talk recently about the failures of microfinance, particularly in India. After digging a little deeper I noted that most of what was being labeled “microfinance” simply wasn’t, or wouldn’t be labeled as much by father of the movement Mohammad Yunus. The interest rates were several times higher than his Grameen Bank, were being given to individuals, and men. Now, “most microfinance institutes charge exorbitant interest rates, ranging between 30 to 50 percent, and sometimes more.” Grameen only lends to groups of women and their interest rates are 20% for income generating loans, 8% for housing loans, 5% for student loans, and 0% for beggars.  The issue with these other MFI’s is that they are as usurious as the people and businesses that Yunus was trying to displace.

When I first encountered micro-finance I thought it was an amazing idea. I “drank the kool-aid”, so to speak. My academic adviser at the time helped contextualized it for me – he’d seen micro-finance in the field but it only seemed to help as a positive feedback in conjunction with other programs. Later I stopped my involvement with a Chinese microfinance group when I saw how large their loans were. The size of the loans, their interest rates, and who was being lent to has made me question whether a lot of this is worthy of the name micro-finance. It would be like calling the forced displacement of a mother tongue a women’s literacy program.

I’ve defended micro-finance from the Marxist left who view micro-finance as capitalist penetration to every level of society. My retort is to question their assumption that the people getting these loans are somehow in a pre-capitalist state. Like Amartya Sen, I think we can critique a lot of capitalism without also denying that lack of equitable access to markets is a deprivation of rights, of positive freedom. As an example, just seven families run the rice wholesale trade in the Philippines. It’s extremely difficult for smallholders to get fair prices when they have to deal with collusion. Smallholders also have to deal with massive imports of cheap imported rice. From my vantage point, the solution isn’t to remove poor farmers from the market but get them as close as possible to fair retail prices.

The same applies to credit. I understand the economics of it works out, but think about it: huge multinational banks are given loans by the government at the cheapest rates anywhere – sometimes paid to take on the loans! Their cheapest loans are then passed on to their safest (read: richest) customers, usually big businesses. At the very, very bottom of this chain are the poorest of the poor. They get the highest interest rates. The banks that got the cheapest rates get bailed out when their loans go sour, while smallholder farmers have been forced to sell their wives because of drought.

It’s in this spirit that I support micro-finance. The poor are taking out loans but often from the worst sources possible, at the worst rates, and are the least able to cope when something goes wrong. It would be great if the poor didn’t need credit. But, like everyone else reading this, they do. So it’s comparable to something like giving clean needles to heroin addicts. You don’t have to agree with loading the poor up with debt to understand that giving them better credit choices is better than leaving it up to chance or the market.

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Filed under Development, Economics

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