The Problem with Microcredit

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The Problem with Microcredit

It can be hard to do good, writes Jennifer a week ago. I must add, it gets harder when the platforms through which well-meaning people try to do good become co-opted by the powerful to protect their own interests.

Microcredit is a perfect example.

What is microcredit?

At its core, microcredit is a mechanism that allows the privileged to reach out to the less fortunate, providing them with means to put up a small business. These aspiring entrepreneurs become entitled to microloans, which they can pay back under more flexible arrangements.

To the poor families in my country, this is a great alternative to dealing with banks whose standard operating procedure is to ask for proof of employment or regular income and properties to be presented as collateral, which they obviously lack. Often, this leaves them no other choice but to seek out the loansharks who do not impose these requirements.

“5-6” is what we call it here, and this is why: If one borrows five pesos, he has to pay six, or, the principal plus 20% interest. Many vendors participate in this scheme, and if you go around the wet market or walk by the streetside stalls here in the Philippines, it is quite common to see men in turbans – most of the lenders are Punjabi Indians – come by to personally collect payments. Failure to settle the debt so would sometimes mean having the borrower’s house raided for appliances like electric fans, television, or radio – anything deemed valuable to qualify as repayment.

In the world of financial services marketing, there is a phrase people like to use to describe this segment of the population: ‘financially underserved’. If you ask me, this is nothing but a euphemism for the poor from the informal economy who will never be entitled to a loan under regular circumstances, whether from the commercial banks, or the public financing institutions.

With the advent of microfinance, governments and businesses can now happily talk about the existence of banks for the poor and call it the solution to poverty.

The Problem with Microcredit - micro loans at low interest to help them build a business that enables poverty alleviation

Milford Bateman, writing for Jacobin, eloquently talks about the history of microcredit, from the time it was conceived by economist Muhammad Yunnus and then peddled by such organizations as the World Bank and USAID, to when it faced a multitude of controversies.

The realities of this ‘solution’ to poverty.

He discussed two main “shortcomings” that spelled microcredit’s ultimate failure: displacement, or when competing microenterprises are defeated by the entry of new players; and exit, or when both new and existing microenterprises close up because of market saturation.

Indeed, microcredit assumes a continuing, if not rising, demand for products and services among the poor where the small entrepreneurs supposedly operate. But this cannot be the expectation especially in developing countries, where wage remains low and employment opportunities are limited for the poor who lacked education as a result of their life situation. For families in this context, food is priority, the rest are considered luxuries.

If anything, the demand for what microenterprises can offer will always be superficial and short-lived, and at most, what we will very likely see is a windfall of income in the first three to six months of the business. It must be added that whatever money is involved will simply be passed around within the same impoverished community.

There can be no foreseeable upward mobility in this scenario, unless the products find an outside market willing to pay for much, much more. While this has happened to some social enterprises, a microenterprise becoming a success story is definitely the exception, not the rule. This is the reality for the rest of the miroentrepreneurs: They tried to run a business and failed, and are deeper in debt than before. In the meantime, they might need to secure more loans to get by. The worst part is that their dreams for a better future are crushed, and sometimes it is easier to repay a debt than to revive a person’s hope.

And yet we see microfinance being hyped over and over by the same culprits that benefit from the promotion of its underlying principles: If the poor weren’t just so lazy or unimaginative, or so focused on demanding things from their government, they could get on their feet.

We have got to stop this madness.

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