Is Microfinance Pushing the World’s Poorest Even Deeper Into Poverty?
Once touted as an tool of empowerment for the world’s underprivileged, micro loans and micro lenders have come under increasing scrutiny and criticism. Why? It turns out for many borrowers micro loans can lead to financial slavery. Loans to women are often taken by men and in certain societies women are forced to work two or more jobs to pay back the original loan just so as to avoid ‘shaming’ the family. Micro loans have done wonders in some instances and have been disasters in others.
Some borrowers have brought themselves out of poverty and others have sold kidneys or a part 0f their liver to pay down their debt.
Something is very, very wrong. Now all we have to do is figure out how to fix the problems.
In August, Bangladeshi police broke up a ring of human organ dealers operating in Joypurhat, a district in the north of the country. Investigators say that three local “brokers” preyed on a large pool of indebted farmers, who agreed to part with a kidney or a chunk of their liver for a couple thousand dollars—enough for them to pay down their debts. Mosammat Rebeca and her husband sold their kidneys to help pay back 180,000 taka ($2,358) owed to five separate lenders—a massive sum in a country where the per capita annual income hovers around $1,700. Rebeca’s husband was paid 135,000 taka ($1,768) for selling his kidney last year, but it wasn’t quite enough. “We were about 65,000 taka short, so I had to donate my kidney as well,” she told me in a recent interview.
Rural indebtedness is as old as the earth in South Asia, but what was notable in this case was its source. Instead of the usurious village moneylenders of old, many organ sellers say they were victims of a new, apparently virtuous, engine of economic empowerment—microfinance. While such micro-loan programs have been widely touted as a ladder out of poverty, they had become a crushing burden for many in Joypurhat, who spoke to me of entangling webs of debt and the aggressive tactics of NGO debt collectors. Indeed, stories like the ones I heard in Bangladesh speak to a larger backlash, both on the ground and in the academy, against the practice of offering micro-loans as a tool for international development. While the majority of microcredit institutions are doubtless well-intentioned, in many places an unregulated and overzealous lending market has led to rashes of personal indebtedness and desperation that are a far cry from the development outcomes originally envisioned by experts and donors.
THE PRACTICE OF OFFERING micro-loans as a tool for poverty alleviation has a long and multifaceted history, but most popular accounts begin with Mohammad Yunus’s decision to establish the Grameen Bank in 1976, handing out small loans to impoverished households in rural Bangladesh. In the view of Yunus and other early boosters, access to credit was directly linked to poverty reduction: Granting access to funds at reasonable interest rates would allow the poor to avoid the usurious rates of traditional moneylenders and use the funds to start small businesses and cottage enterprises. In addition, one of Grameen’s key innovations was to target its financial services at women, who bear a disproportionate burden of poverty and are thought to be more reliable financial clients than men. Given the chance, Yunus came to believe, Bangladesh’s rural women could form self-reinforcing networks of trust that would guard against defaults. In short, the poor could be made “bankable.”