Tuesday, November 23, 2010

Micro-finance in the spotlight

For a few years now micro-finance has been held up as one of those ideal ways of combating poverty in the developing world. Essentially a system of small loans to people who wouldn't otherwise be able to get credit the idea is that it enables the poor to buy that shovel to help themselves dig themselves out of poverty.

But as Karl Marx once said "Give a man a fish and you feed him for a day, teach him how to fish and you miss a golden business opportunity."

So the companies that have been managing the micro-financing operations make their money by charging interest well over the odds and because the system works by lending to small groups it allows the company to put pressure on entire communities with weekly meetings monitoring what they're doing to repay the mini-loans despite that fact that many workers are paid yearly. That's right, it turns out that micro-finance is another word for loan shark but, and here's a sweet spot, they aren't regulated in the same way as money lenders.

Because the ideology behind micro-finance says that you beat poverty through enterprise it was held up uncritically as a success even before the schemes were operational.

What started out as an idea to alleviate poverty has become a way of getting the poorest into the kind of debt they hadn't been able to get into before, and that has a very real price - including a wave of suicides, like that of 16 year old student Lalitha Mursilmula who was told by the company she would have to become a sex worker in order to pay off her families debts. She ran home, wrote a note to her family and then drank a lethal concoction of fertiliser. The unethical behaviour of the micro-finance has deepened an already existing problem.

In India politicians have ordered people *not* to pay back their loans because of the social harm the industry is doing which in turn is leading to India's own little sub-prime crisis. It seems to me that the way to solve the problems of capitalism is not to find new and more ingenious ways of tightening capitalism's grip on the world.


James said...

Look out for an article exposing microfinance in the new Red Pepper, out in just a few days now.

neil craig said...

Depends whether your prime objective is to destroy capitalism or to make ordinary Indians wealthier.

Jim Jepps said...

Neil, micro-finance is making the micro-finance companies wealthier at the expense of some of the poorest people on the planet because they are able to skirt round money lending legislation.

So far there's no evidence that micro-finance is making ordinary Indians wealthier, but there is evidence that there has been a spike in suicides of poor people directly linked to the schemes.

My argument is that more debt has not had a net benefit for the poor.

Parag said...

This is hard to believe. Micro financing has been introduced to help poor fight poverty and improve their way of living. The points in this article like a 16 year old girl committing suicide comes as a shock. How can these companies who provide small loans exploit people to such a level?

Jim Jepps said...

I think the thing is Parag that whatever the intentions of those who promoted the idea the reality is the implementation is in the hands of loans companies that have found they are less regulated than others - and they've taken advantage of that.

We have to examine seriously the idea that getting people into deeper debt is a way to get people out of poverty.