By Harini Amarasuriya | Published: 2:00 AM Mar 20 2021
Since the late 1970s and the establishment of the Grameen Bank, by Muhammed Yunus in Bangladesh, the idea of providing credit facilities to the poor who find it difficult to access conventional credit facilities have been touted as a way of lifting people out of poverty. The idea was to provide access to loans on reasonable terms: long-term loans, manageable payment instalments and group lending were some of its key features. Microfinance schemes also do not require sureties like conventional lending institutions – sureties that the many do not possess. Yet, whether the original intent of microfinance schemes is sustained in the implementation of microfinance schemes today is doubtful.
Today, microfinance has become a profitable industry – there are around 15,000 microfinance institutions – mainly operating among the poorest sections of the community lending money, primarily to women at very high interest rates. Activists critical of predatory micro-finance schemes and researchers state that on average, in some areas, each person is in debt to three different institutions. Women are subject to threats and intimidation, including sexual harassment by collectors who aggressively demand payment. Around 200 cases of female suicides have been reported due to inability to repay loans or to face the pressures of repayment in the last three years alone.
This phenomenon is generally regarded as a problem of insufficient financial literacy, lack of entrepreneurial skills and inability to manage debt. Yet, the predatory nature of micro-finance companies is rarely understood as a problem of current economic policies where social protection, social security and poverty alleviation have become profitable enterprises. These micro-finance schemes are not designed to lift people out of poverty: providing credit to the vulnerable has become a source of profit. Rather than investing in economic policies that generate employment and income for people – Governments have outsourced this work to private industries under the cover of self-employment, entrepreneurship and expanding access to credit. Empirical research has found that rather than lifting people out of poverty, micro-finance schemes have trapped the poor, especially women, in cycles of crippling debts.
Although the amounts being lent are small, extremely high interest rates mean that people are often forced to pay three to four times more than what was originally borrowed. Even with a cap, interest rates are as high as 35%. The aggressive culture of repayment and the group pressure to repay debts has damaged family and community relationships. Breakdown of relationships of cooperation and collaboration have damaged essential support networks among poor and vulnerable communities, pushing people to desperate acts such as suicide.
A common complaint from pro-microfinance groups is that the loans are spent on consumption rather than on income generation initiatives. Let us for a moment set aside the difficulty of actually generating income from micro-finance supported schemes. How is it that in a country that ostensibly has strong social protection measures such as free education, universal health care and price control of essential goods, household debt is so high? According to the 2016 Household Income and Expenditure Survey, households spend 7% and 5.8% respectively on health and education. Schools now require regular contributions from families for infrastructure and facilities.
In addition, the poor quality of teaching or in some cases the lack of teachers has made ‘tuition classes’ almost inevitable – particularly around crucial competitive examinations such as the Grade 5 Scholarship, Ordinary and Advanced Levels. Long-term neglect of public health infrastructure and services force people to seek private medical solutions. At the very least, laboratory testing and medication has become privatised as testified by the presence of multiple private labs and pharmacies in the vicinity of Government hospitals. Poor public transport means that expenditure on private transport has also increased. Given these conditions, it is not surprising that credit facilities are made use of for urgent household expenditure.
Historically, credit was obtained through local money lenders and running up an ‘expense’ account at the local ‘kade’ which was settled periodically. This was not a system without its own culture of exploitation and violence, but the fact that the relationships that sustained these exchanges had to be managed locally prevented the worst of excesses. Community standing and acceptance was based on managing these relationships. Even the most miserly money lender and most avaricious local mudalali were restrained by the need for at least a minimal degree of community acceptance. The entry of micro-finance institutions has professionalised these relationships so that the personal and social element is lost. Collectors who are paid based on their ‘success’ in obtaining loan repayments and who have no investment in the life of the community in which they operate, are not held back through the fear of social rejection or damage to personal relationships. Consequently, the levels of intimidation, harassment and violence linked to micro-finance schemes are very high.
So what can be done? Promises were made during the election to cancel debts incurred through micro-finance schemes. Let alone debt cancellation, even the moratoriums granted for loans obtained through banks were not made available for micro-finance schemes. The fact that the vast majority of micro-finance institutions are unregistered, and the sector operates pretty much unregulated, means that none of the rules and conditions that apply to the regulated financial sector applies here.
Yet, the problem is not simply that of lack of regulation, registration or financial literacy. There is a fundamental problem in the notion of debt being viewed as an answer to alleviating poverty. This stems from the idea that social welfare and social protection breeds ‘dependency’. The problem is that those who preach independence and self-reliance for the poorest and most vulnerable sections of our society have no compulsions or concerns about the massive national debt in which the whole country is tied up. Haven’t recent incidents provided ample evidence of the lack of bargaining power a country indebted as ours has in the international arena? Before we lambast the poor for inadequate financial literacy and ‘wasteful’ expenditure, is it not at least fair that we consider the financial literacy of those making financial decisions that affect the country as a whole? Yes, the poor need access to credit facilities and financial services, but they must be designed in ways that don’t trap them in debt cycles that only serve to enrich micro-finance companies. Programmes that encourage more collective and collaborative entrepreneurship initiatives have more potential for alleviating poverty than those that disrupt existing networks of support and cooperation.
This is not a problem about the poor: this is a problem of an economic model that is only interested in protecting and supporting an entitled few. Self-righteous rhetoric that talks of the need to teach people to ‘honour’ their debts or that debt cancellation is impractical etc. simply mask the structural violence of an economic model that in its very design is exploitative and extractive.
By Harini Amarasuriya | Published: 2:00 AM Mar 20 2021