Microloans for Development - The Myth and the Reality
There is nothing new about the exploitation of the weak and vulnerable by the wealthy and the powerful, but the sheer scale of destruction wrought by microfinance institutions modelled on Grameen Bank of Dr Mohammed Yunus in what was originally hailed as a development masterpiece - was staggering. Commercialised copycat banks provided microloans at mega interest rates to the poor and destitute with the intention of starting businesses. The Grameen Bank founder received the Nobel prize in 2006 and in "development circles", the project was hailed as a success, but nothing could be further from the truth.
Grameen Bank has an apparently extremely relaxed approach to the no-interest loans they disburse and it apparently has extremely low default rates - or so it says.
The problem is, that in Bangladesh, where Grameen covers 98% of villages in that country, the plight of the desperate rural poor have become worse, many have poor mortgaged land and limb, and lost.
Yunus' loans were seen as a panacea for the often neglected rural poor but that model rapidly saw the mushrooming of institutions that found a new way of disposing of excess capital whilst making a fortune and consigning the recipients to misery (Grameen's initially noble interest free loans gave way to interest loans and a whole new level of misery was created.)
In the 30 years since Grameen first gave it's first micro loan to groups of rural women, poverty in Bangladesh is greater than ever before and so too are the growing numbers of landless. The bank has a high repayment or recovery rate and part of the reason may be that a certain type of loan called the "joint liability loans" saw groups of villagers get a loan and the same group policed the repayment through harassment and forcible property confiscation of the defaulter by fellow circle members.
Although Yunus' venture is non-profit whose average loan size was around US$127, "for-profits" soon climbed on the bandwagon in a commercialisation frenzy with predatory interest rates that bankrupted small scale farmers and even drove them to suicide (notably in India) as the phenomena spread and all in all created poverty traps.
A study published a few years ago by Economists Dean Karlan of Yale University and Jonathan Zinman of Dartmouth College in the journal of Science investigated microloans supplied to almost 1,000 filipino micro business owners and compared the outcomes for two similar groups, one that received microloans and one that did not, over a two year period and found that Microloans don't help expand businesses. A 2009 MIT study found roughly the same results. So what were these loans good for then? - well, it appears that they were mainly used for subsistence - to buy food, clothing and pay for school fees. Although not entirely true, it did encourage the uptake of micro enterprises but there was no corroborating evidence that it positively affected the bottom-line indicators of poverty. This happened en-masse in Bosnia after the civil war destroyed the economy in the 1990's.
Milford Bateman in his brilliant expose entitled "The rise and fall of Muhammed Yunus and the microfinance model" had this to say :
"By the mid-2000s, the microcredit model was the international development community’s most generously funded and supposedly most effective anti-poverty intervention. Microcredit was soon wildly popular among the ordinary public, too, not least thanks to a long list of celebrities from all walks of life offering their support."
It then goes on to prove that micro-financing might very well be the worst intervention in development ever.
The reason for this was that initially, Grameen and others like it internationally were subsidised by International donor organisations, host governments and other sources. However, it goes on to say :
" With neoliberalism from the 1980s onwards the guide to development policies in developing
countries, the idea of a market-driven intervention requiring subsidies to keep going was clearly
anathema.
Armed with its core imperative that all organizations must strive to achieve what it called ‘full cost
recovery’, not just businesses but virtually all other organisations too, neoliberal policymakers
simply could not tolerate a situation where large numbers of MCIs (Micro Credit Institutions) were
subsidised.
Accordingly, once again under USAID tutelage, the microcredit movement was given a decisive
shift in the direction of commercialisation and deregulation, with the aim of ensuring its effective
transformation into a financially self-sustainable for-profit model no longer in need of subsidies
(Otero and Rhyne 1994). The old subsidised Grameen Bank-style microcredit model was consigned
to history, replaced by a more commercially savvy ‘new wave’ of Wall Street-style go-go MCIs.
After the World Bank, IMF and Jeffrey Sachs famously arrived in the 1980s to restructure the
economy according to standard free market textbook principles, (as mentioned before)
Bolivia became the ‘test-bed’ for the new ‘neoliberalised’ microcredit model..." and
" ... With neoliberalism in the ascendance in key western governments from the 1980s onwards,
the market-driven microcredit model soon became an important international development policy."
So began the downward spiral of astonishing greed that reduced loans-for-aid to loans-for-debt
slavery.
For instance, the paper mentions that in 2007 when Mexico's largest microfinance bank Banco Compartamos presented it's IPO, it was an event that rather than exposing impressive poverty reduction figures, exposed a level of greed and profiteering by senior managers that "stunned all those working in the microfinance sector" and this ushered in the rapid decline of the micro credit model.
Another salient point raised was that there was never a shortage of finance supply but the that the model itself was doomed to failure because it tended to create industries in poverty stricken areas that that firstly already had hundreds of struggling similar enterprises and it generated unsophisticated goods that tended to be sold in the very poverty stricken areas that it was situated in.
In August 2010, SKS Microfinance, the country's most rapidly successful microcredit organization, held a public IPO that made millions for its founder, ex-McKinsey-consultant Vikram Akula. Many hailed the achievement as proof that microcredit could be financially self-sustaining. Local
politicians saw it as Robin Hood inverted - a plot to steal from the poor and give to the rich. They persuaded borrowers to stop paying back their loans.(4)
So what is the status quo here in Africa and what are he answers ? - Microfinance for creating micro industries suffer not only from predatory interest practices by commercialised lending outfits, there are other problems too.
"....As noted development economist Ha-Joon Chang points out with regard to the African continent
(see ‘Thing 15’, Chang 2010), there are more micro-entrepreneurs informal micro-enterprises and self-employment ventures per capita than probably anywhere else in the world. Many more are being created all the time thanks to rafts of micro-credit programs backed by the developed countries. Yet Africa essentially remains in poverty because of this fact.
What is really missing here are the institutional (financial and non-financial) and associated
organizational structures, including ‘developmental state’ structures, required to raise productivity
through carefully establishing and supporting much larger manufacturing-based/industrial businesses
operating in the formal sector. The massive proliferation of petty individual entrepreneurship in Africa, and so also the diversion of scarce financial resources, technical expertise and state/collective effort into supporting this sector (that is, the opportunity cost), is actually a huge part of the problem holding back Africa.
The danger is that a proliferation of micro informal sector businesses (creates hyper-competition) created by microfinancing, creates primitivisation and actually hampers the growth of the more efficient enterprises in the formal business sector and in so doing, slows down overall development - an accepted fact now in Bolivia. (Bolivia was one of the testbeds for the neo-liberal, commercialised microfinance model).
Microfinance is not the universal panacea it was once touted to be. Ultimately, what is needed is the creation of more jobs in the formal sector and the expansion of export oriented industrialisation with resulting job creation with healthy worker rights institutions protecting worker rights that are key to sustainable job creation and poverty alleviation in the developing world. Unfortunately, the social legitimacy granted to the microfinance industry by governments and "respectable" international finance organisations as well as the development community needs to be deconstructed and the real outcomes of this concept need serious publication and selling at governmental level. If micro enterprises are to be supported in any way, it should be a highly considered excercise favouring innovation based business ideas. Both of the aforementioned including the considered construction of a Developmental State as outlined in the Bateman paper will positively contribute to a longer term, sustainable development initiative for developing economies.
In the next related article on SMME development in South Africam we can look at the S. A. government's interventions and policies vis-a-vis SMME financing and development.
* Of interest see this article on the state of Township Spazas in South Africa.
References:
1. Microfinance and the Illusion of Development: From Hubris to Nemesis in Thirty Years - Milford Bateman et al
2. (4) (https://www.theatlantic.com/business/archive/2011/01/lies-hype-and-profit-the-truth-about-microfinance/70405/)
Grameen Bank has an apparently extremely relaxed approach to the no-interest loans they disburse and it apparently has extremely low default rates - or so it says.
The problem is, that in Bangladesh, where Grameen covers 98% of villages in that country, the plight of the desperate rural poor have become worse, many have poor mortgaged land and limb, and lost.
Yunus' loans were seen as a panacea for the often neglected rural poor but that model rapidly saw the mushrooming of institutions that found a new way of disposing of excess capital whilst making a fortune and consigning the recipients to misery (Grameen's initially noble interest free loans gave way to interest loans and a whole new level of misery was created.)
In the 30 years since Grameen first gave it's first micro loan to groups of rural women, poverty in Bangladesh is greater than ever before and so too are the growing numbers of landless. The bank has a high repayment or recovery rate and part of the reason may be that a certain type of loan called the "joint liability loans" saw groups of villagers get a loan and the same group policed the repayment through harassment and forcible property confiscation of the defaulter by fellow circle members.
Although Yunus' venture is non-profit whose average loan size was around US$127, "for-profits" soon climbed on the bandwagon in a commercialisation frenzy with predatory interest rates that bankrupted small scale farmers and even drove them to suicide (notably in India) as the phenomena spread and all in all created poverty traps.
A study published a few years ago by Economists Dean Karlan of Yale University and Jonathan Zinman of Dartmouth College in the journal of Science investigated microloans supplied to almost 1,000 filipino micro business owners and compared the outcomes for two similar groups, one that received microloans and one that did not, over a two year period and found that Microloans don't help expand businesses. A 2009 MIT study found roughly the same results. So what were these loans good for then? - well, it appears that they were mainly used for subsistence - to buy food, clothing and pay for school fees. Although not entirely true, it did encourage the uptake of micro enterprises but there was no corroborating evidence that it positively affected the bottom-line indicators of poverty. This happened en-masse in Bosnia after the civil war destroyed the economy in the 1990's.
Milford Bateman in his brilliant expose entitled "The rise and fall of Muhammed Yunus and the microfinance model" had this to say :
"By the mid-2000s, the microcredit model was the international development community’s most generously funded and supposedly most effective anti-poverty intervention. Microcredit was soon wildly popular among the ordinary public, too, not least thanks to a long list of celebrities from all walks of life offering their support."
It then goes on to prove that micro-financing might very well be the worst intervention in development ever.
The reason for this was that initially, Grameen and others like it internationally were subsidised by International donor organisations, host governments and other sources. However, it goes on to say :
" With neoliberalism from the 1980s onwards the guide to development policies in developing
countries, the idea of a market-driven intervention requiring subsidies to keep going was clearly
anathema.
Armed with its core imperative that all organizations must strive to achieve what it called ‘full cost
recovery’, not just businesses but virtually all other organisations too, neoliberal policymakers
simply could not tolerate a situation where large numbers of MCIs (Micro Credit Institutions) were
subsidised.
Accordingly, once again under USAID tutelage, the microcredit movement was given a decisive
shift in the direction of commercialisation and deregulation, with the aim of ensuring its effective
transformation into a financially self-sustainable for-profit model no longer in need of subsidies
(Otero and Rhyne 1994). The old subsidised Grameen Bank-style microcredit model was consigned
to history, replaced by a more commercially savvy ‘new wave’ of Wall Street-style go-go MCIs.
After the World Bank, IMF and Jeffrey Sachs famously arrived in the 1980s to restructure the
economy according to standard free market textbook principles, (as mentioned before)
Bolivia became the ‘test-bed’ for the new ‘neoliberalised’ microcredit model..." and
" ... With neoliberalism in the ascendance in key western governments from the 1980s onwards,
the market-driven microcredit model soon became an important international development policy."
So began the downward spiral of astonishing greed that reduced loans-for-aid to loans-for-debt
slavery.
For instance, the paper mentions that in 2007 when Mexico's largest microfinance bank Banco Compartamos presented it's IPO, it was an event that rather than exposing impressive poverty reduction figures, exposed a level of greed and profiteering by senior managers that "stunned all those working in the microfinance sector" and this ushered in the rapid decline of the micro credit model.
Another salient point raised was that there was never a shortage of finance supply but the that the model itself was doomed to failure because it tended to create industries in poverty stricken areas that that firstly already had hundreds of struggling similar enterprises and it generated unsophisticated goods that tended to be sold in the very poverty stricken areas that it was situated in.
In August 2010, SKS Microfinance, the country's most rapidly successful microcredit organization, held a public IPO that made millions for its founder, ex-McKinsey-consultant Vikram Akula. Many hailed the achievement as proof that microcredit could be financially self-sustaining. Local
politicians saw it as Robin Hood inverted - a plot to steal from the poor and give to the rich. They persuaded borrowers to stop paying back their loans.(4)
So what is the status quo here in Africa and what are he answers ? - Microfinance for creating micro industries suffer not only from predatory interest practices by commercialised lending outfits, there are other problems too.
"....As noted development economist Ha-Joon Chang points out with regard to the African continent
(see ‘Thing 15’, Chang 2010), there are more micro-entrepreneurs informal micro-enterprises and self-employment ventures per capita than probably anywhere else in the world. Many more are being created all the time thanks to rafts of micro-credit programs backed by the developed countries. Yet Africa essentially remains in poverty because of this fact.
What is really missing here are the institutional (financial and non-financial) and associated
organizational structures, including ‘developmental state’ structures, required to raise productivity
through carefully establishing and supporting much larger manufacturing-based/industrial businesses
operating in the formal sector. The massive proliferation of petty individual entrepreneurship in Africa, and so also the diversion of scarce financial resources, technical expertise and state/collective effort into supporting this sector (that is, the opportunity cost), is actually a huge part of the problem holding back Africa.
The danger is that a proliferation of micro informal sector businesses (creates hyper-competition) created by microfinancing, creates primitivisation and actually hampers the growth of the more efficient enterprises in the formal business sector and in so doing, slows down overall development - an accepted fact now in Bolivia. (Bolivia was one of the testbeds for the neo-liberal, commercialised microfinance model).
Microfinance is not the universal panacea it was once touted to be. Ultimately, what is needed is the creation of more jobs in the formal sector and the expansion of export oriented industrialisation with resulting job creation with healthy worker rights institutions protecting worker rights that are key to sustainable job creation and poverty alleviation in the developing world. Unfortunately, the social legitimacy granted to the microfinance industry by governments and "respectable" international finance organisations as well as the development community needs to be deconstructed and the real outcomes of this concept need serious publication and selling at governmental level. If micro enterprises are to be supported in any way, it should be a highly considered excercise favouring innovation based business ideas. Both of the aforementioned including the considered construction of a Developmental State as outlined in the Bateman paper will positively contribute to a longer term, sustainable development initiative for developing economies.
In the next related article on SMME development in South Africam we can look at the S. A. government's interventions and policies vis-a-vis SMME financing and development.
* Of interest see this article on the state of Township Spazas in South Africa.
References:
1. Microfinance and the Illusion of Development: From Hubris to Nemesis in Thirty Years - Milford Bateman et al
2. (4) (https://www.theatlantic.com/business/archive/2011/01/lies-hype-and-profit-the-truth-about-microfinance/70405/)
