Why one non-profit worker thinks microcredit can hurt development
Sufiya was a poor villager in Bangladesh. She received a small loan to buy some chickens to start an egg business. The chickens flourished, the eggs were the talk of the town, and soon her loan was paid back with enough extra income to buy a goat to sell milk as well. (Take that, poverty!)
Sadly, a more realistic picture of this familiar story is that Sufiya’s chickens did well the first week, but then caught a bacterial disease she didn’t know how to treat. With five dead chickens and zero insurance, Sufiya remains in poverty; only now with a debt that will continue to grow until it’s paid in full.
I was horrified the first time I heard someone critique microcredit. Ever since Muhammad Yunus started the Grameen Bank to bring business capital to the world’s poor, these small-scale loans have been considered the silver bullet for ending poverty. But three decades and two Nobel prizes later, the honeymoon phase is wearing off.
Business 101
To begin with the basics, we’re not all entrepreneurs. In North America, there’s a fifty per cent chance that a new business will fail before the five-year mark — that is with the benefit of literacy, job training, insurance, market research, and thousands of books and blogs about how to succeed in business. But too often we assume that all the materially poor need to succeed is a bit of seed money.
Thankfully, several microfinance institutions and organizations don’t offer loans in isolation. They provide literacy classes, leadership training, skills development, and financial coaching. This is absolutely vital to an effective poverty-reduction strategy. But I still find myself questioning the wisdom of a credit-based model, and I’m not the only one.
Insider Opinion Turns
After 15 years as one of the biggest contributors to microcredit institutions, Norwegian aid agency NORAD decided to pull financial support from all new microcredit operations in Bangladesh (home of Yunus and Grameen Bank). [ac1] Last year, Yunus was controversially removed as head of the microcredit empire under suspicion of misappropriating funds.
New industry studies claim that microfinance has had no measurable impact and independent journalists are starting to detail the tragic consequences of microcredit’s flipside: a web of debt.
Just as someone might use one credit card to pay off another, some desperate borrowers are forced to take new loans to pay off old ones. This may be a better option than giving up the family home or cow to pay the debt. But as loans pile up — and without the option or knowledge of bankruptcy or deferment —journalists report that suicide is sometimes chosen as the only escape. Still, it’s hard to know who to trust in an insider debate this polarized. We’ll never know how many suicides were prevented through microcredit’s successes.
A Shouting Match
Late last year I saw just how controversial this issue has become. I travelled to Vancouver with two aid workers who used the car ride to reflect on their involvement with a microloan program that has since — for the better, they said — shut down.
The three of us were going to the Canadian screening of The Micro Debt, an award-winning 2010 documentary by Danish journalist Tom Heinemann. The film travels from Bangladesh to India to Mexico, sharing the stories of microcredit borrowers who say their lives were ruined by loans. It’s widely believed that allegations from the film cost Yunus his job.
As the shocking tour de force ended and the lights came back on, I never would have guessed that the real drama was just beginning. Heinemann took the stage and shared about the making of the movie, then announced that he would take questions.
An international development master’s student asked about the microcredit website Kiva, which was not implicated in his coverage. A second student asked about the empowerment of women, who are the primary beneficiaries of the loans. Then the Bangladeshi man seated directly behind me stood to identify himself as an associate of Yunus from the upper echelons of the Grameen Bank.
That’s when things got heated. He proceeded to call out the filmmaker for his outright lies. He then produced a large stack of documents that included a letter from one of the experts in the film who claimed he was misrepresented.
Everyone went home that night with a small, stapled stack of counterarguments he had prepared. And like the film, they also seemed legitimate.
Back to Basics: Debt vs. Savings
The more I dug into their politicized arguments, the more I realized they couldn’t be my deciding factor. I might never know whom to trust in the midst of scathing allegations and conflicting testimonies. I had to go back to the initial arguments that caused me to rethink my years of casual microcredit acceptance. At the core, it’s an issue of debt versus savings.
When you don’t have security, it’s never wise to take a loan. And therefore, it’s questionable to encourage someone without security to accept a loan. We may hear glowing repayment rates of 97 or 98 per cent for microfinance institutions, but of course the bank will always get their money back; that’s what loan officers are for. What’s lost along the way is seldom documented.
In a best-case scenario a loan would be given to cover any gaps once a borrower has already saved a substantial amount toward their project. That way the bulk of the profit stays within their growing operation and remains in circulation in their community.
With outside microfinance institutions, the loan plus interest is returned outside the community instead of entering the local economy. More loans are then needed to advance a business to the next level, but again, that capital leaves the community once it’s served its purpose.
Skin in the Game
A few months ago I met with Laura Hunter, a Savings and Credit Association Specialist with Food the Hungry (FH) in Washington, DC, who regularly works overseas. If I ever had concerns that my opinion of microcredit was denying people the capital they needed to survive, Hunter eased my fears. “ “It’s a pretty big assumption to think that all the poor are lacking is capital,” she explains.
Hunter is involved with a movement known in the field as one of the cheapest, most sustainable development activities. She helps train leaders for grassroots community savings groups that are growing like crazy in parts of Asia and Africa.
Loan sharks abound in impoverished areas, and microfinance institutions are always extending their reach, but there are few options for residents who want to save securely. Without the easily available option to “bank” money, any extra is just as likely to be spent on drinking or gambling as it is on school fees or preventative medications.
“Savings isn’t sexy,” says Hunter. “It’s a discipline.” Savings groups provide a way for people with irregular incomes to smooth their spending throughout the year with deposits as small as seven to fourteen cents per week. It’s an exercise in budgeting a small income — an important discipline for members to develop as they train together in literacy, numeracy, legal rights, and business skills.
With 10 to 30 members each, the savings groups set their own constitution and elect their own leadership. They independently decide what amount will be contributed weekly or bi-weekly, and they also establish rules for group members borrowing from the communal pot once it reaches a certain amount. They set their own interest rates, and soon their own savings are being used to start businesses. As each loan is paid back with interest, their balance grows.
At the end of each year, members cash out, and usually find that their savings have multiplied substantially. For the 117 FH groups in one Mozambique community, that meant a total of $239,406 in a year. This in an area where the average income is less than $2 a day. In Bangladesh, where savings groups offer education and opportunity for traditionally oppressed women, 1,094 groups have saved $670,000.
Beliefs Matter
These numbers make me uncomfortable because they raise all sorts of hidden assumptions I’d rather not confront. They mess with my deeply-rooted idea of poverty that says materially poor people aren’t capable of such things. For some reason I’m surprised when I hear of remote locations with some organic form of a “Rosca” — a fund where community members contribute part of their monthly income and the combined amount goes to a different family each month. I still find it hard to believe when I read reports of community savings groups drafting their constitution to include a social security and development fund to cover emergencies and community projects.
As important as it is that my beliefs are changing, it’s not half as powerful as the change that happens when someone struggling with hopelessness realizes their God-given potential. But it’s this potential and confidence that can be killed when outside funds are offered.
In an example from Cambodia, savings groups were offered matching funds for when they reached the $300 mark as an incentive for their progress. Instead, these groups’ savings each stayed around the $300 mark, while groups without the incentive far surpassed that amount. It’s a classic case of good intentions having dangerous effects.
The Chalmers Center is a key player in savings group training and biblically-based sustainable development. In July it published an article on the impact of community savings groups in Rwanda, describing how the groups are multiplying as more people see the results. It describes how groups comprised of genocide victims are reaching out to families of jailed perpetrators, helping them start financial plans for when their relatives return.
The article covers financial improvements, but it’s more about the intangible change. It quotes an elderly savings group member — Esperance — who was overheard talking to the mayor at a city celebration. ”I am in a savings group!” she exclaims. “I am a millionaire! I have my own account book. I have bought my own goat, and I have 4,000 francs [$6.54] in my account.”
She may not be a millionaire, but the 72-year-old finally feels stable and secure. Could this have been made possible with an outside microloan? Most likely, yes. And that’s reason enough for me not to be so hard on microcredit. But the fact is that she accomplished this transformation from her own savings and the savings of others in her community. Now that’s a model of self-sufficiency and accomplishment I can really get behind.
