Microcredit: Selling Bootstraps to the Global Poor
If anything can honestly be called trendy in the world of poverty reduction and international development, micro-credit is it. With the awarding of the 2006 Nobel Peace Prize to the Grameen Bank and its founder, Muhammad Yunus, the media was flooded with feel good articles about the promise and wonder of micro finance. It has been embraced as the 21st century solution to global poverty by everyone from the UN and World Bank to Citibank. It is therefore important for the progressive community to take a step back from accolades and heartwarming magazine pieces to take a closer look at microcredit, and what it means to the movement for social and economic justice.
Microcredit broadly refers to the practice of extending small loans to people who generally fall outside the reach of banking systems: people without jobs or collateral, people living in poverty. The best-known organization practicing microcredit as a large-scale anti-poverty strategy is the Grameen Bank. Grameen makes small loans to groups of women who then invest the money in moneymaking enterprises, such as basket weaving, animal husbandry, or small stores. The women in each community are responsible for insuring that the other members of their borrowing group repay their loans, and Grameen claims to have over a 98% repayment rate.
The Grameen model has been adopted and adapted by a wide variety of non-profit and for profit organizations. The World Bank estimates that there are over 7,000 microfinance organizations world wide. It’s easy to understand why. Microcredit presents a narrative that fits well with American bootstrap ideology. We like to imagine millions of Horatio Algers world wide, working their way from rags to riches, because something had faith in them and gave them a loan.
The reality of microcredit is much more complex, even troubling. To begin with, nearly all microcredit organizations charge incredibly high levels of interest. Very few programs charge interest rates of less than 20%, and many organizations charge much more. Compartamos, a fast growing microcredit organization in Mexico charges 105% to 120% in interest, fees, and taxes on each of their loans. These rates are justified with the argument that managing a large number of small loans is expensive, and that most (but by no means all) programs offer something in addition to money to their clients, like literacy classes or job training. Microcredit proponents also argue that their clients have no other options; banks won’t lend to them, and even astronomical interest rates are lower than what is offered by traditional moneylenders or pawnshops. What all of this amounts to, however, is a tax on the poor, for being poor. Poor people are being charged an amount of money which would be considered immoral or illegal in the first world, in exchange for access to the most basic financial systems.
In addition to concerns about interest rates, there have been a growing number of questions about the actual effectiveness of microcredit as an anti-poverty strategy. When I was living in Chiapas, I spent time doing oral history interviews with women who were in the process of repaying loans to a local microcredit NGO. The majority of the women I interviewed (out of a sampling of around 25) were poor indigenous women living on the outskirts of San Cristobal, who had used their loan to buy supplies for making artesania, or traditional crafts. Most of them had no access to markets, however, and the tourist markets in San Cristobal were overcrowded with hundreds of women selling the same items for almost nothing. They sold their goods for a pittance to middle men who were passing through. They continued to pay off their loans every week, but imagined that they would just get a new one once their first had been paid off. They were not working their way towards independence, they were just scraping by. The two exceptions to this rule, were two mestiza women, both
of whom lived in San Cristobal, and both of whom spoke Spanish as their first language. One had invested her money in livestock breeding, and the other in a grilled chicken stand. Both of them had increased their standards of living, but neither would have been classified as poor, by the standards of Chiapas, before applying for loans.
Studies have shown that microcredit has failed to lift the poorest of its borrowers out of poverty. According to an article in the Left Business Observer, after 8 years of borrowing, 55% of Grameen households aren’t able to meet their basic nutritional needs, and spend a portion of their loans on basic subsistence items. Borrowers who are most successful with microcredit are those who already have the most access to traditional education and finance systems in their communities. The rest are simply trapped in another cycle of dependence and subsistence.
Beyond the problematic day-to-day function of microlending, however, there are broader political and justice implications that must be addressed. By promoting enterprises like handicrafts and peddling food door to door, microcredit ignores the reality of economic development. Rather than addressing the underlying causes of global poverty, such as colonialism, land ownership, the exploitation of national resources by first world countries, or developing strategies for the growth of local industries or production, microcredit pushes the poor into underground or unofficial economies with little possibility for growth or stability. No poor country or community has ever moved out of poverty through individual capitalist enterprises, yet microcredit is being pushed by international agencies as a solution to global poverty.
Microcredit as a development strategy also forces the poor to bear the entire risk burden themselves. If a microcredit agency provides insufficient support, or training, or encourages a borrower to enter a market that is already overcrowded, it is left to the person who can least afford it to pay the price for their poor planning. Rich nations and organizations are asking the poorest of the poor to pay for their own social programs.
Even more disturbing is the emergence of for profit microfinance programs, promoted by corporations like Citigroup and eBay Founder Pierre Omidyar. Both banks and international institutions have lauded for profit microlending as the most cost-effective way of getting banking services to the world’s poor, and Citibank has even been installing ATMs and issues credit cards to their microcredit borrowers. Ultimately however, what it comes down to is a transfer of wealth from the poorest people in the world to the richest, a transactional which is morally indefensible.
As much as it is easy to be swayed by the heartwarming stories and seemingly easy answers of microlending, it is our responsibility, as progressives, as international solidarity activists, and as donors, to think about our priorities, and what kind of growth we want to support. Do we want support community based development—development that meets the needs and priorities of communities and offers them a future that is better than their present? Do we want to support movements that demand rights such housing, education, healthcare, dignified work, and financial support from their governments? Do we want to demand that colonial powers and international corporations repay even a portion of the billions of dollars they have stolen from developing nations around the world? Or do we want to create a permanent class of people working in informal jobs, without growth, without a social safety net, without security? Do we want to continue to build systems that take from the poor and give to the rich? We need to build movements that reach for everything that is possible, rather than just settling for what is available. To me, at the end of the day, microcredit is just a failure of the imagination.
Micro Credit, Macro Issues, October 14 2006, The Nation website
Microcredit, Microresults, October 1996, The Left Business Review
Millions for Millions, October 2006, The New Yorker
The Wikipedia article on Microcredit
Category: Payday loans