Should I donate and join my school’s microcredit club? Should I support Safeway by donating $5 for their microcredit program? Those two options always get me into a dilemma. Not that I don’t care about those poor people that could benefit from microloans, but my concern is rather towards whether the advisor of microcredit club, which was my economic instructor whom I know pretty well, would think I’m a good person; or, in Safeway’s case, where would my money go – only just because I don’t want my $5 to go to the pockets of Safeway’s proprietor – I’d rather spend it for myself.
Call me a heartless-bastard but I have my very own reason to say so. I’ve seen with my own eyes how microcredit doesn’t solve the poor’s predicament; not solely because the idea of microcredit itself, but the very-poor beneficiaries are also a vast group of wart on the healthy skin of microcredit, which will eventually bring havoc to the microfinance system. In his book, The Ascent of Money: A Financial History of The World, Niall Ferguson clearly states that microfinance could help the very-poor, but it is surely not “the holy grail solution to the problem of global poverty, (280)” Ferguson is surely right that microfinance is not a solution for the eradication of poverty, but he is missing important points when he says that microcredit acts “as an antidote to predatory lending of loansharks” (280). Contrary, in reality, commercialization of microcredit and the widespread of financial illiteracy make the poor even more prone to “predatory lending”; thus, creating a loophole in microfinance system.
In 2006, not long after being awarded with Nobel Peace Prize for his work in developing microloans to help economic and social development, Mohammad Yunus stated, “Microcredit should be an area for social business where you want to help poor people get out of poverty by doing business… You get your money back, but you don’t make profit out of it” (Yunus). But my story started even before he was awarded with Nobel Prize. My mom, a finance director of an adjusting company, and four of her friends, who were active in humanitarian works, were electrified by Yunus’ idea and decided to try his concept to help the very-poor people surrounding our neighborhood in Indonesia.
In 2003, during its first year, their small group limited their clients up to only five people to anticipate in case the project didn’t work. The microloans project charged no interest, and by the end of the first year, it actually worked; the borrowers got their business going, and the loans were all given back to the lenders.
Its success inspired them to expand their network – asking more groups of friends to join in and it was very well received. Yet, some of those new members, even some of its founders turned out to be interested in something more than just helping the poor – they want money. Adequate funds from the new lenders had made it possible to take up more clients; from five to almost a hundred only in a two-year span. However, in 2005, they started to charge interest as high as 40 percent a year. As predicted, by 2007, it failed. Many of the borrowers couldn’t pay their loans and the microloans project lost almost 60 percent of its capital.
That year, my mom said, “was one of the worst year of my life. My intention was only to help, but I felt less than a compassionate human being, and much more than a loanshark” (Interview). She then continued, “it was a very traumatizing experience, not only for me, but also for the borrowers.” She recalled that one of her borrowers had to sell her business simply because she felt guilty for not being able to pay back the loans. My mother’s experience shows that commercialization of microfinance, which Mohammad Yusuf refers to a code word for making money out of exploitation of the poor, isn’t working.
But my mother’s story is nothing compared to what has happened in India. According to Sa-Dhan, an umbrella group for microfinance institutions in India, their loan portfolio jumped from $252 million to $2.5 billion between 2005 and 2009. (Chandrashekhar) At the same time, some of India’s lending firms were growing from 60 percent to 100 percent a year (Bajaj). However, this situation is not evidence of a better economic condition; what it actually tells us is that, as Shiek Hasina Wazed, prime minister of Bangladesh, puts it, “[microlenders] were sucking blood from the poor in the name of poverty alleviation” (Bajaj). New York Times also reported that some raft banks or financial institutions were drawn by the prospect of hefty profits with some charging interest of 100 percent or more (Microfinance). Due to this commercialization problem, evidently, in Krishna, a small-poor rural district in east of Andhra Pradesh, India, some women were reported to have killed themselves because they couldn’t repay their loans (Microsharks).
However, commercialization of microcredit is just one facet held accountable for creating a loophole in microfinance system. Another crucial aspect that seems to be overlooked while discussing microfinance is financial illiteracy. As cited by Niall Ferguson, one survey in 2007 reported that four in ten American credit card holders do not pay the full amount due every month, despite the punitively high interest rates charged. “Nearly a third (29 per cent) said they had no idea what the interest rate on their card was” (11). Another survey by University of Buffalo’s School of Management suggests that high school seniors scored just 52 per cent in response to a set of questions about personal finance and economics. Many other studies and surveys also documented that less than 25 per cent understood that stocks would generate a higher return over eighteen years than US government bond and knew that income tax is charged on the interest earned from a savings account if the income is high enough (11). Tragically, these long lists of findings have important consequences, not only for the sake of our money, but also for the broader domain of microfinance system.
Reported by Consultative Group to Assist the Poor (CCAP), private equity valuations, a process of estimating the worth of private equity, Indian microfinance were six times book value, three times global median, and the excess capital flows were driving overvaluation (Chandrashekhar). Some Indian experts are worried that this condition will trigger microfinance bubble, much like the U.S subprime housing bubble, which then leads to a greater recession. Both bubbles, however, were created from our irrational exuberance. Commenting on the subprime housing bubble, Ferguson himself writes, “… there was irrational exuberance about bricks and mortar and the capital gains they could yield” (281). Similarly, Sanjay Sinha, a managing director of Micro-Credit Rating in New Delhi acknowledges, “There is a global exuberance about microfinance – a flood of money without the infrastructure to distribute the money” (Chandrashekhar). Unfortunately, these two irrational exuberances were resulted due to financial illiteracy.
Financial illiteracy’s problem is best exemplify with American mortgage housing bubble. Ferguson mentions, “There was, as the economist Rober Shiller has said, simply a ‘widespread perception that houses are a great investment’, which generated a ‘classic speculative bubble’ …” (281). This statement adequately shows that even in a country like America, financial ignorance distorts our best judgment simply because we don’t have the knowledge – ironically, as Ferguson puts it, “Financial illiteracy may be ubiquitous, but somehow [we think] we were all experts on one branch of economics: the property market. We all knew that property was one-way bet. Except that it wasn’t” (281). If such thing happened in the U.S, what could be happening in India?
India’s financial illiteracy, I would say, has reached its peaked. There is a story of a family that has three loans – 10,000 rupees from a local self-help group and another 10,000 rupees from the local moneylender, and a third from a microfinance institution (Chandrashekhar). It is surely tragic when you know that two of those loans were used to pay for a wedding, while the other loan was used to repay the other two loans. Some would find it funny, but I’m sure others would find it heart-crushing because that family is being pushed to a debt trap. Think about it this way, from 22 millions of India’s microfinance borrowers, how many of them weren’t using their loans to create business? This is yet another tragic story that shows us that the beneficiaries themselves, without adequate knowledge of finance, could lead to financial catastrophe.
However, it would be surely a mistake to say that microcredit doesn’t work. It helps a lot of people, yet if it didn’t, Mohammad Yunus wouldn’t be getting Nobel Peace Prize anyway. But sometimes, great ideas are truly great only if they are applied carefully and in limited quantity. The same thing, as we have seen, happened during the housing bubble; microfinance is growing up fast to an unsustainable level, and this has yet to stop. Poor people equal philistinism; they are more driven by materialism rather than intellectualism – thus, loansharks capitalists are using that weakness to make profit in the name of poverty alleviation.
In my humblest opinion, education is the key. Education holds the global key to end poverty. Microcredit might empower the poor to a certain level, but without transparency of microfinance institutions and adequate education for the borrowers, it wouldn’t work. After all, “Microloans wouldn’t consign poverty to the museum.”
— Citation
Bajaj, Vikas. “15 Years In, Microcredit Has Suffered A Black Eye.” New York Times 6 Jan. 2011: B3(L). Gale Opposing Viewpoints In Context. Web. 14 June 2011.
Chandrashekhar, Vaishnavi. “In India, Warnings of A Microfinance Bubble.” Christian Science Monitor 30 June 2010. Gale Opposing Viewpoints In Context. Web. 14 June 2011.
Ferguson, Niall. The Ascent of Money: A Financial History of The World. New York: Penguin, 2008. Print.
“Microfinance.” New York Times. The New York Times Company, 18 November 2010. Web. 14 June 2011.
“Microsharks.” Economist 380.8491 (2006): 62-63. Academic Search Premier. EBSCO. Web. 14 June 2011.
Telephone interview. 19 June 2011.
Yunus, Muhammad. “Should Microfinance Be Commercialized?” Big Think | Blogs, Articles and Videos from the World’s Top Thinkers and Leaders. 25 Jan. 2008. Web. 16 June 2011. <http://bigthink.com/ideas/3230>.
