Microloans = Mega-profits, not development

By Sara Flounders

Feb 24, 2010

The fraud and failure of microloans and micro-financing as the bankers’ solution to global poverty can most clearly be seen in Bangladesh today, where microloans first gained international fame and support.

For 25 years a steady drumbeat of rhetoric from international bankers, major corporations, the United Nations and the World Bank has promised that small loans of $10 to $150 to totally destitute people to set up small handicraft and home businesses is the solution to global poverty and underdevelopment. Micro finance was applauded as the way to increase educational levels, promote gender equality and empower women.

Nicholas Kristof declared in a recent column: “Microcredit is undoubtedly the most visible innovation in anti-poverty policy in the last half century. In the three decades since Mohammad Yunus gave his first loan to a group of Bangladeshi women, the number of microcredit borrowers has crossed 150 millions.” (New York Times, Dec. 28, “The Role of Microfinance”)

Microcredit loans whether used to buy a few items to sell on the street or a bicycle rickshaw are a debt trap and cannot lift a family out of poverty.

Hundreds of millions of dollars have been pledged to the microcredit movement by tens of thousands of NGOs and Western governments, as well as by financier George Soros, eBay co-founder Pierre Omidyar, Wall Street banks and hedge funds that see a new source of profit. The United Nations designated 2005 as the International Year of Microcredit, while the Nobel Committee awarded the 2006 Nobel Peace Prize to Yunus and his Grameen Bank of Bangladesh.

The World Bank has set up a division to channel funds through its Consultative Group to Assist the Poorest. The Asian Development Bank and other international financial institutions now channel billions of dollars — which once went to development projects like irrigation projects, dams, roads and industries — into tiny loans through a vast lending and collection infrastructure that reaches its tentacles around the world.

In Bangladesh, as microcredit and other neoliberal market “solutions” have grown, poverty has not lessened. It has grown to staggering proportions.

At the time of independence in 1971, 20 percent of the population was landless. By 2009, this had risen to more than 70 percent of the rural peasant population. After 30 years of the microloan panacea, banking institutions and a whole apparatus of nonprofit financial NGOs funded by the West today reach into every village and smallholding in Bangladesh.

Is it just a coincidence that more than 100 million peasant workers have been reduced to day laborers and indebted sharecroppers? Overwhelmingly, peasants lose their lands through inability to repay loans. One drought, flood or sickness spells disaster for a whole family.

By every standard, poverty has worsened in Bangladesh over the past two decades as microloans became the all-pervasive “solution” to poverty. Grameen Bank, the institution that initiated microcredit, claims to have 2,500 branches covering 80,000 villages, or more than 95 percent of all villages in Bangladesh. Loans are as small as $10 and $20.

A web of loans

Community and peasant organizers in Bangladesh recently described to this reporter how the web of microloans at the village level breaks down a collective approach and consumes millions of desperately impoverished people in competitive individual tasks. The weight of debt demoralizes millions and leads to new debts to pay off old ones. High rates of suicide and violence follow when the cycle of debt crashes.

The Socialist Party of Bangladesh, in a recent convention document, condemned the manner in which Western industrialized countries have cut allocations for educational programs, basic health programs and funds for social welfare and instead created a network of NGOs and microcredit systems. “Practically speaking, using the microcredit system brings the labor power of poor people, especially the labor power of women, under the exploitation of banking capital,” said the document.

“In the name of capitalist development in industrially backward countries the financial institutions of imperialism provide surplus capital as loans in exchange for huge interest and impose conditions of liberalization, privatization, reduction of expenditures for public welfare, commercialization of health care, education and other social sectors, and the removal of tariff barriers for the investment of imperialist capital in the industrial and agricultural sector. ... Unemployment is growing far more than ever.”

Economics journalist Gina Neff of Left Business Observer has written, “In Bangladesh, 30 years after Yunus’s invention, poverty statistics are worse than they’ve ever been. ... After eight years of borrowing, 55 percent of Grameen households still aren’t able to meet their basic nutritional needs - so many women are using their loans to buy food rather than invest in business.

“Turning peasant women into mini-capitalists is just furthering the reach of finance capital and shifting the burden of risk to a class who already bear the brunt of poverty without safety nets.”

Aneel Karnani, a professor at the University of Michigan’s Ross School of Business, argues that microcredit does not empower women or increase the number of people with jobs or the gross domestic product of a country.

The U.N.’s International Labor Organization explains that “creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. Nothing is more fundamental to poverty reduction than employment.”

Microcredit interest rates are widely heralded as being lower than those of traditional money lenders, but still range between 40 percent and 100 percent per year, far more than loans to middle class borrowers or traditional bank loans.

Local field officers are usually paid on commission and repayment rates are their measure of success. This leads to violent forms of debt collection.

The most brutal forms of loans - Joint Liability Loans — are now the most common. A microloan is made to a group of five to eight borrowers, who then hold joint accountability for the repayment. A default by any one individual means ruin for the group and risk to a whole village. In desperation, the group becomes the enforcer of the loan. This saves the bank having to handle uncollectible debts. Neighbors or other family members, fearful of default, will strip the home and all the belongings of anyone in a group who is unable to repay even a small debt.

Debt, not development

Rather than providing decent and stable jobs building desperately needed infrastructure like roads, ports, dams, irrigation, schools, clinics and social services, the goal is self-employment as petty entrepreneurs.

Imperialist countries have cut public financing of health, education and other social services. Western aid is now focused on grants for microcredit loans. This leads to privatization at every level and the shredding of what minimal social safety programs exist.

This is not a mistake. It is the heart of the capitalist ethic. Financier Yunus, seeking Western funding for his Grameen Bank, has declared that “All people are entrepreneurs.”

But home-based piece work, “casual labor” and self-employed petty production schemes are not security or a step out of poverty. Debt is not liberation.

Peasants forced off the land, women and men, find the same debt trap in the densely populated cities. Millions of tiny loans mean millions of unemployed laborers frantically leasing bicycle rickshaws, setting up tiny kiosks, buying a few chickens, a hand loom, a sewing machine, setting up another one of the tens of thousands of snack and tea shops or hawking a few articles of clothing or food on crowded streets.

All this petty production does not lead to prosperity or to increased production. It means the country will not develop nor will poverty be sustainably reduced.

Expanding market

The profits from hundreds of millions of tiny microloans are only the smallest part of the imperialist looting of developing countries. The theft of resources and the vast exploitation of labor through the lowest possible wages are what allow international finance capital to survive. But the financiers have found a new way to reach into the most isolated villages and threadbare hamlets and further channel the misery they have created into still greater profits.

And the capitalists admit it. Wrote the Wall Street Journal last Aug. 13: “What began as a social experiment to aid the world’s poorest has also shown it can turn a profit. That has attracted private-equity funds and other foreign investors, who’ve poured billions of dollars over the past few years into microfinance worldwide.”

In the poorest countries of Asia, Africa and Latin America, micro-financing is increasingly profitable to the largest banks but deadly for the development of these countries.

Microfinancing is an expanding market. According to the Microcredit Summit Campaign, there are presently 150 million borrowers, more than two-thirds of them women. Citibank is a major financer of the annual Microcredit Summits, which estimate that more than 500 million poor people worldwide need their financial services.

Although the loans were originally considered risky, the attraction in this period is that the rural developing world has remained largely insulated from the global economic slump.

The Wall Street Journal article explained that over the previous year, investors had poured more than $1 billion into the largest microfinance funds managed by companies, a 30-percent increase. The extra financing will allow the industry to loan out 20 percent more this year than last, much of it to countries such as Ukraine, Cambodia and Bosnia, the World Bank’s CGAP says.

Across Eastern Europe, the Balkans and in the former Soviet republics, the end of socialist central planning has meant the shuttering of thousands of industries. It has also meant massive cuts in social programs. The solution of Western banks and thousands of imperialist-sponsored NGOs is programs of similar microloans and informal-sector microenterprises. Formerly unionized workers, scientists, engineers and teachers can now obtain “liberating” small loans to sell kabobs, pastries, phone cards, used clothing and knitted scarves on street corners and in tiny kiosks.

However, the Wall Street Journal also warned that the microdebt bubble could burst. This financial publication went on to describe how in India, poor neighborhoods were being “carpet-bombed” with loans. India is a country where 79 percent of the people live on less than $2 per day and 39 percent of adults are illiterate. Yet profiteers are attracted by the big returns to be extracted from loans there.

The Journal article described a debt revolt that broke out in the city of Ramanagaram. Local mosque leaders started telling people in the predominantly Muslim community to stop paying their loans. Borrowers complied en masse. They also demanded that banks give an accounting of their finances. The repayment revolt has spread to other communities, including the nearby city of Channapatna. Wall Street is worried that this could spread further across India.

Mass movements to cancel the debt — both national debts that are sinking whole economies and microdebts that are sinking millions of already destitute and unemployed people — are the only possible approach to the debt trap. Organized, planned development and collective ownership of all resources is still the only way out of poverty.