Far from being a cure-all, small loans add to poverty by burdening people with unsustainable debt, says Jason Hickel, who teaches anthropology at the London School of Economics. "What’s so fascinating about the microfinance craze is that it persists in the face of one unfortunate fact: microfinance doesn’t work." Hickel argues that the only gainers in the microfinance business are the lenders.
In South Africa, for example, consumption accounts for 94% of microfinance use. As a result, borrowers don’t generate any new income that they can use to repay their loan. “So they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt." Hickel explains. Hickel goes on to relate that when micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand. “After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding no net increase in employment and incomes." He argues that is the "best of the likely outcomes. The worst – and much more likely – is that the new businesses fail, which then leads, once again, to vicious cycles of over-indebtedness that drive borrowers even further into poverty."
David Roodman of the Centre for Global Development also says “The best estimate of the average impact of microcredit on the poverty of clients is zero.”
A comprehensive DFID-funded review of extant data comes to the same conclusion: the microfinance craze has been built on “foundations of sand” because “no clear evidence yet exists that microfinance programmes have positive impacts.”
Hickel declares that "The only consistent winners in the microfinance game are the lenders, many of whom charge exorbitant interest rates that sometimes reach up to 200% per annum (as in the case of Banco Compartamos). In the past we would have called such people loan sharks, but today they’re called microfinance providers, and they crown themselves with the moral halo that this term carries." Hickel is unusually scathing when he says: "Microfinance has become a socially acceptable mechanism for extracting wealth and resources from poor people."
Hickel concedes that microfinance retains its attraction as a development option despite its failure being recognised at even the highest levels. He has some explanations for that.
"Because it promises an elegant, win-win solution to the problem of poverty, it assures us that we – the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing arrangements of political and economic power. In other words, it promises revolution without the messiness of class struggle. And, what is more, it promises that we can help save the poor while making money from it. It’s an irresistible tale." Hickel says microfinance is also a "a very effective tool of political control. It’s the neoliberal development strategy par excellence. Bankers shall be our new heroes and debt our salvation. Debt, incidentally, is a great way to keep people docile."
Milford Bateman, another critics of microfinance, has previously pointed out that the movement had its roots in the US government’s “containment strategy” in Latin America. Micro-credit does not address structural issues surrounding poverty - so governments who like to evade structural change are attracted to micro-credit. In Bangladesh, the micro-credit gurus such as Mohammed Yunis came to the fore because military and quasi-military regimes did not want to address the core issues around poverty.