Following yesterday’s class, I was incensed that we had not managed to solve the problems of the world in two hours of heated IR discussion. Then I remembered that some bright spark had mentioned the potential for micro- financing to save the day. So, I took it upon myself to take a closer look at the potential for this wondrous idea to transform the dreary lives of the poor into the fabulous lives which we currently enjoy.
First, a short history on micro financing: Micro financing is the provision of small loans to the poor who would otherwise be unable to gain financial support through traditional means. It was started in 1976 by Dr Muhammad Yunus, the Head of the Rural Economics Program at the University of Chittagong, who launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. What started with a $27 loan to a group of women who made bamboo furniture subsequently grew into the Grameen Bank Project (Grameen meaning “rural” or “village” in Bangla language).
The Grameen Bank Project had the following objectives:
- To extend banking facilities to poor men and women;
- To eliminate the exploitation of the poor by money lenders;
- To create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh;
- To bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and
- To reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income”.
Grameen grew to have 8.3 million customers in Bangladesh alone and more than $1 billion in loans outstanding. It boasted a 98.5 per cent repayment rate, with villagers taking loans in groups and guaranteeing each other’s debts. Significantly, 90% of the bank’s shares were owned by its borrowers, with the other 10% owned by the government. The list of awards and accomplishments the Grameen achieved is extensive (there’s a Nobel Peace Prize in there!)
Micro financing was touted as a “bottom up solution to poverty”, and rapidly gained support from the highest offices; wealthy philanthropists such as George Soros and eBay co-founder Pierre Omidyar pledged hundreds of millions of dollars towards the microcredit movement. The UN announced 2005 as the International Year of Microcredit, and UN General Secretary Kofi Annan touted micro financing as a solution to global poverty, stating “the great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.”
But the lustre of micro finance came to a rapid halt circa 2006 when critics of the system began to crunch the numbers and found that, far from being the fountain for sustainable development, in many cases micro financing actually disadvantaged the poor it was intended to help! Having been hailed as a magic solution to poverty for more than a decade, the enemies and sceptics of microfinance were now having a field day, with allegations of “loan-sharking”, high interest rates and intimidation being broadcast across western media on a regular basis.
The 2007 film Micro Debt, by Danish film maker Tom Heinemann, is an interesting critical investigation into the darker side of microcredit for anyone interested. It outlines the intimidation, harassment and abuse of borrowers by members of their loan groups, and shows the spiral of indebtedness which can occur and take years to escape. In some cases, suicide appears to be the only viable escape; in the Indian state of Andhra Pradesh more than 50 farmers committed suicide and micro financing has now been made illegal in that state.
From an IR perspective, Microcredit has been criticised as being a neoliberal fairy-tale, as it is based on an attractive but false premise that the individual can create wealth for themselves without outside assistance. Unfortunately, enterprise which is begun with micro financing is unable to be sustained without assistance from government or aid funds. Without this injection of funds, lending groups must charge high interest rates (reported to be up to 125% in some cases). Feminists have also chimed in with their own critique, stating that micro financing does not encourage inclusion, participation or empowerment, but in fact has a tight set of rules set up to extend current global imbalances.
That being said, the growing network of microcredit agencies does provide a real difference to people’s lives by providing access to fresh water, sustainable agriculture and small business. What it does not provide however is statistically demonstrable improvements in the economic, political and social structures which are likely to have caused much of the problem to begin with. But can we say that any aid does this, especially after the statistics presented to us following recent events such as the Rwandan genocide?
While micro finance may not be the solution to global poverty, perhaps Kiva is an approach with the more realistic potential to tap into the vast wealth of Western middle classes. Kiva allows aid to go directly from a small aid donor (like us) to an individual recipient without having to pass through the giant cogs of the international aid bureaucracy. While this system is promising, it can only work if the middle classes participate, and the real problem is overcoming the inertia and indifference of the middle classes. How do we do that? Maybe the only way is to resort to the tried and tested methods and use guilt to pressure them into spreading the wealth to those who really need it.
Or maybe micro finance is all just a neo-liberal fantasy and we should discontinue our pursuit of this seemingly utopian dream. Unfortunately, the debate continues.