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Microfinance covers up some crooked dealings

By in Opinions

TED SPRAGUE
The McGill Daily (McGill University)

MONTREAL (CUP) — Microfinance has been touted as a magic bullet with real potential to solve that nagging question of poverty, but in reality, it’s creating a problem for the people it intends to help.

A Kenyan brickmaker who used a microloan to increase business
Stories have been recounted, repackaged and retold to convince the whole world of their success. A poor person in the developing world without access to traditional banking obtains a small loan from a microlender, and within months, she has built a house or grown her business. The story is easy to digest, thus its success in convincing people that providing the poor needed capital will enable them to climb out of their wretched lives.

In and of itself, the idea seems benign and noble. However, we don’t live in a vacuum. Big financial institutions now dominate microfinance. It has turned into a macro-racket — a $30-billion market, with big players like Crédit Suisse, Morgan Stanley, the French insurance group AXA and the Blackstone and Carlyle groups, just to name a few.

The microfinance industry’s high average portfolio yield — 22.3 per cent annually, according to one study — coupled with the appearance of helping the poor has attracted these multinationals. For them, microfinance is a gold-mine.

Some may not see the problem. What’s wrong with big businesses making a lot of profit if it means more capital is available for the poor? This is akin to saying that it’s all right for businesses to build sweatshops in poor countries if it means providing jobs. This mentality is that of an exploiter; it takes advantage of the desperation of the unemployed poor.

The penniless poor, eager to improve their lives but lacking means, gracefully accept the loans only to taste their bitterness when the installments are due. Most of us here don’t even read the small-print clauses of loan agreements. It’s no surprise that poor people around the world don’t either.

Microcredit is a “new kind of debt trap,” as Indian philosopher and activist Vandana Shiva says. It scoops up hundreds of millions of people who have so far been out of reach from the snare of the capital and forcefully, with tricks and sugarcoated loan packages, ties them to the system. It sucks people into a permanent dependence on credit.

The secret to microfinance’s high portfolio yield lies in its interest rates — 20 to 25 per cent. This interest casts a heavy shadow upon borrowers’ households. To meet their installment payments, they are compelled to work from dawn to dusk, dragging along their whole family to engage in feverish production.

Because most borrowers depend on voluntary family labour, there aren’t any labour standards. Workers’ safety, restrictions on child labour, overtime pay, holidays and minimum wage are concepts alien to this system. This is the only way a household could produce enough to meet the payments. At the end of the day, microcredit is creating micro-sweatshops.

Muhammad Yunus, the Bangladeshi economist who pioneered microcredit and received a Nobel Peace Prize for it, might have been sincere in his endeavour to help the poor, but I’m not interested in a psychological analysis. Good intentions are not enough to justify folly. Microcredit, like other buzzwords, has been co-opted by the very system that it wishes to redress. It’s a band-aid solution that has become a new tool of exploitation.

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image: Hodag

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