kanthari Blog 29-01-2021

Microcredit, a magic wand to fight poverty or profitable business at the cost of the poor?

– Multi series on microfinance, part 2
by Sabriye Tenberken

“The poor themselves can create a poverty-free world. All we have to do is to free them from the chains that we have put around them.” – Muhammad Yunus, Bangladeshi economist, and Nobel Peace Prize laureate.
Muhammad Yunus’ quotes lead to a number of questions:
– What is his definition of “chain”?
– Who does he mean with “we”? And who is putting the chains around the poor?
– How can the poor themselves create a poverty free world?
While I highlighted microcredit as a possible opportunity in part one, today’s post deals with the probable “chains”: the indebtedness of the poor.

3. Credit as a fundamental right
According to Muhammad Yunus, every person should have a fundamental right to credit. However, this can also be explained in a different way: debt-creation is a human right. Sure, but only if everyone has the same opportunities as the banks which were pulled out of the mess by state subsidies during the global crisis. Only then can one take the risk of accepting a loan.
But for Muhammad Yunus and Grameen Bank, subsidies and grants of all kinds are seen as charity and are therefore strictly excluded from the microfinance program. So, while indebted banks are bailed out during economic crises, the poor are ‘expected to help themselves?’. Microcredit is, after all, branded as a means of self-help.

I wanted to know more and remember some kanthari graduates who came from poor over-indebted families. They saw microcredit as strangulation of their entire communities.
For example, Cavin from Kenya, founder of Wa-Wa, a “Fisherwomen Academy”. He attended kanthari in the same generation as Selassie, the microcredit advocate I gave a voice to in the last blogpost.
Cavin was one of the passionate critics in our debates. He knew first-hand the side of borrowers all too well. His mother had four children to look after at the time. To do so, she sold fish on the market. But to get the fish, she had to offer sexual services to the fishermen. The phenomenon of “sex for fish” made Cavin’s home region of Homabay County on Lake Victoria infamous. Many women became HIV positive, died and left orphans behind. Cavin’s parents also died and he somehow managed to survive two years on the street before being taken in by a childless lady. Today, Cavin fights for the dignity of the women of his region. Through his Fisherwomen Academy, he wants to give mothers direct access to Fish. Wa-Wa trains them in everything about fishing, from tying nets, building boats, fishing on Lake Victoria, to fish farming in self-built ponds.

Microcredit is not part of the Wa-Wa program. Cavin focuses on intensive training, on inner motivation as well as on value creation through work.
During our discussions on microcredit, Cavin vividly described how his mother accepted the offer from lenders out of sheer desperation. But every time payday was approaching, the whole family was under stress. He remembers the lenders coming to their homes, loudly claiming the debts, and eventually, with no cash being available, taking all blankets and bedding, cooking utensils and even the only cow as repayment.
“For us, having debts meant embarrassment and even deeper poverty from which we could no longer recover.”

Cavin’s experience coincides with those of Tony Joy’s, a kanthari graduate of 2017. She is the founder of Durian, a social venture that aims to reduce poverty in remote areas of Nigeria. Her initiative is about “Waste to Value”. For example, bamboo, a plant considered worthless in Nigeria, is used as a material for production of crockery and cutlery, as well as construction of furniture and buildings. Durian also trains the members of the community in both craftsmanship and business administration. But the organisation does not believe in micro-credits as start-up financing.
“It’s the shame of getting into debt and the fear of social exclusion that should stop everyone from falling into the credit trap.” Tony knows about cases in which people were forced to sell their daughters to lenders to pay off their debts.

4. Beyond the beautiful surface
Despite all this, the solution to poverty reduction has rarely been so ‘sexy’! According to Muhammad Yunus, microcredit can banish poverty to museums, promote the emancipation of women, and they help all of us to do good without making a sacrifice. Or even better, they ensure that everyone involved gets richer.
Measurable indicators of the success of the ‘Miracle Weapon’ are the high repayment rates of 95% to 100%. After all, if you can repay, you must have made it! isn’t it?
Interestingly, most lenders seem to be content with a few success stories, a few beautiful pictures with smiling women, but do not want to know in detail how the lives of borrowers have fundamentally improved and how poverty is supposed to have miraculously reduced. After all, the Nobel Peace Prize, given to Muhammad Yunus and the Grameen Bank in 2006, shines above all this… the result must be right somehow.

But if we want to know more, we don’t have to dig deep to quickly find what we are looking for. Through the authors and journalists Kathrin Hartmann and Gerhard Klas as well as through the award winning documentary The Micro Debt by Tom Heinemann, one inevitably comes across the renowned economist Anu Muhammad, a compatriot and critic of Muhammad Yunus. In a study by the Jahangirnagar University, he paints a vastly different picture. Here it says that only five to ten percent of borrowers have made the leap out of poverty with the help of micro-credits. 50% live as poorly as before and 40% have even experienced deterioration in their standard of life after taking a loan. Anu Muhammad also believes that the high return rate is likely. But he does not turn a blind eye to the fact that a high return rate does not equal a high success rate.

In the previous blog post I mentioned MFIs, the micro-finance institutions. These are often formerly non-profit, non-governmental organizations that, lured by the promise of high returns, suddenly transform themselves into profitable microbanks. The difference: While ordinary customers must travel to the bank in the next village, this bank comes directly to the borrower’s doorstep. The question is, what is the bigger threat?

The aforementioned documentary, The Micro Debt, shows through several examples from Bangladesh, Mexico and India how the employees of the MFIs, mostly men, stop their motorcycles in front of the huts of the predominantly female borrowers and loudly demand the overdue payment. Since, according to Gerhard Klas, the MFIs are not regulated, they have every opportunity to put pressure on the debtors by threatening to take off with any essential goods. In the documentary, a Bangladeshi woman tearfully describes how these men dismantled her corrugated tin roof. Others are forced to pay back in the form of chickens, goats, food and even chunks of land they cultivate.

To prevent these attacks, borrowers are repaying one debt with either new loans from other MFIs, relatives or neighbors. The high interest rates cause the women to be trapped in a never ending cycle of payments.
In Nigeria, too, the practices of the MFIs are questionable. According to “Microdebts”, The MFI LAPO offers loans with interest rates of up to 100%.
In Andhra Pradesh, a state in southern India, some MFI debt collectors suggested to send daughters of debtors for prostitution. Others advised debtors to take their own lives, so that their loans could be paid off using life insurance claims. And if the debts in the village have made one unpopular, there are still the credit sharks, those who Muhammad Yunus actually wanted to ban. Through the practice of the MFI and the resulting economy of shame, the sharks now have the upper hand. Because if no one bails out the MFI debtors, they can easily jack up the interest rate to over 100% even up to 300% and, as usual, use violence to guarantee the return.

And then came 2010 – the great awakening. In just two months, more than 50 microcredit debtors committed suicide in the Indian state of Andhra Pradesh. This resulted in a careful questioning of the practices of lenders and the values of social business as a whole. Do keep in mind that there was/is no evidence that microcredit is leading to sustainable social change. Only in some countries the rules of opening an MFI became stricter. Selassie, the microcredit promoter stands behind the decision of the Ghanaian government, that recently has closed down more than 300 MFIs. He says: “”The MFIs have abused their power position and have put women into incredible hopeless positions. With such practices also the positive sides of microfinance get a bad image.”
Despite all this, till date, not much has changed for the better.

So, what is left? The focus on emancipation of women?
In the next blog, I will look at the topic of microcredit as a “means” of promoting women empowerment. And I will point out a special and rather questionable form of microfinance: micro-franchising.