In 1976, a small experiment was conducted in the poverty-stricken and flood ravaged Bangladeshi village of Jobra. Professor Muhammad Yunus, a lecturer of Economics at Chittagong University visited the village and upon seeing the desperate poverty there he decided to lend about $27 (free of interest) as working capital to a few women he met there. To his surprise, the women used the money productively in their modest commercial enterprises and repaid the loan with thanks. This small experiment was to become the basis for a global revolution popularly known as microfinance.
As the new millennium arrived, micro credit had come to be recognised
as the ultimate panacea for endemic poverty. In 2005 the UN Secretary
General Kofi Annan said
it was a critical anti-poverty tool, emancipating women and empowering
the poor and their communities. Yunus claimed that thanks to micro
credit the next generation will only find poverty in museums.
World leaders cheered in unison, overjoyed at the discovery of a
market-based mechanism for eradicating poverty. Thousands of NGOs took
up micro-lending to poor communities with billions of dollars in
development aid flowing through them. The microfinance revolution had
well and truly arrived. The UN declared 2005 as the year of microfinance
and next year a Nobel Peace Prize was awarded to Yunus and Grameen Bank for “efforts to create economic and social development from below.”
Within five years, however, the gloss has started to come off.
Long-standing claims of poverty alleviation and female empowerment came
to be challenged. Reports of usurious interest rates being charged to
desperate borrowers came to light amidst mounting criticism of the
high-handed tactics employed by loan officers to collect monthly
instalments. Collective defaults by entire villages were reported around
the world. Most disturbingly, in the Indian state of Andhra Pradesh, a
hotbed of microfinance lending, dozens of suicides
occurred among borrowers under pressure from large micro-lenders,
forcing the state to clamp down on the exorbitant interest rates.
have found microfinance to have had zero impact on poverty alleviation.
While it still has a big presence in the developing world, and
undoubtedly helps some entrepreneurs find their feet, the hopes and
aspirations that it once aroused are no more.
Yes, many grassroots organisations are doing a world of good
through embedding themselves deeply within the communities they hope to
serve. But the myth surrounding the minimalist model of microfinance
favoured by international agencies and private investors, which involves
only lending at the “true cost of capital” with no other “intervention”
has exploded rather spectacularly.
Here is how the minimalist model unravelled:
Micro-credit could indeed provide a lifeline for desperate borrowers,
if it operated at a small scale and with subsidised interest rates. To
some borrowers it could provide a crutch even at relatively high
interest rates, saving them from the clutches of moneylenders.
But given the huge increases in living costs and the reduced role of
governments, especially with respect to healthcare and education, micro
credit was never going to be able to stem the tide of poverty.
Healthcare is perhaps the number one route to bankruptcy among the poor
in many developing countries and education takes an ever-increasing
proportion of their income.
Painting all the women in the world as heroic entrepreneurs doesn’t
actually make them so. They are heroic all right, given the struggle
they lead against brutal poverty – but entrepreneurial ventures have
always had a high mortality rate. And there aren’t that many which can
deliver the kind of returns one requires to be able to pay back interest
rates in excess of 40%. Given that much of the loaned money is actually
used for consumption, the chances of getting into debt are always high.
Realising that poverty alleviation was an unsustainable and
unachievable goal, the micro-credit industry shifted the goal posts.
“Financial inclusion” was the new aspiration, which in practice meant
access to credit, insurance and other financial products. This was based
on the old Milton Friedman claim that the only difference between the
poor and the rich was access to capital.
The term micro-credit became microfinance and poverty alleviation
quietly moved out of the spotlight. The fact that most borrowers were
using the loans for consumption rather than production was not taken as a
failure to achieve the original goal either. Instead, this “consumption
smoothing” was celebrated as another achievement.
Microfinance then had two different realities. One was the global
celebration of this market-based model for poverty alleviation. The
other was the cruel reality of many borrowers caught up in debt cycles
and struggling against an oppressive neoliberal world order where the
proportion of incomes spent on health, education and food kept going up.
Either way, it presented an opportunity for investors to “do well by
doing good”. Once development agencies and multilateral institutions had
paved the way, global investors piled in. Sitting far away in New York
and other capitals of the financial world, they were attracted by the
tales woven by microfinance providers looking to tap into global equity
markets, tales of helping the poor and making a buck at the same time.
With international capital, however, came unprecedented pressure for
growth and quarterly profits. Those providers who tapped into the equity
markets responded by seeking out more borrowers, and then when defaults
loomed they tightened the screws to keep things on track. They devised
elaborate public shaming rituals
and used these ruthlessly to destroy borrowers’ social capital. Even
Yunus disapproved, accusing them of making profits off the back of the
poorest, neediest members of society.
If the minimalist model, fuelled by global capital, survives today it
is thanks primarily to desperate poverty that engulfs the world and to
bigger loans that target the not-so-poor. Growing polarisation of
society that raises the cost of living for the poor, along with
wholesale privatisation of social welfare institutions, is putting
increasing pressure on the poor.
At best, minimalist microfinance provides a bandage where a major
operation is needed, and at worst, it deepens the wounds. Socially
embedded microfinance institutions that organise entrepreneurs, provide
them with training and then deploy them in larger ventures are much more
effective though high cost propositions. Interest-free microfinance,
based on charity, similarly offers much greater relief. Ultimately,
however, both are largely helpless in face of the neoliberal onslaught.
By Kamal Munir from here with links
Let's point out once again - whilst Kamal Munir hits the nail on the head about treating the effects, 'providing a bandage where a major operation is needed,' - what actually has to be done to secure real changes in overcoming poverty is to go to the root of the problem, to the cause of the poverty and abolish the cause so that it can't raise its ugly head again in one form or another. As we experience over and over within the capitalist system reforms or efforts of one kind or another are brought in to somehow improve the lot of one group or another and very soon we learn of its failure to bring about the desired effects. So, what is the root cause of the misery and poverty described above? Capitalism with its system of money and pecuniary interest. Abolish capitalism and it follows that money and pecuniary interest will go too.
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