Microcredit is the provision of small loans to help establish income-generating micro-businesses or to allow for urgent consumption, whether health care, education bills, home construction or the like. The idea is famously associated with Dr Muhammad Yunus, the US-educated Bangladeshi economist who won the Nobel Peace Prize.
To escape poverty the poor simply needed a microcredit, and then self-help and individual entrepreneurship would do the rest, Yunus claimed. He convinced many international and domestic organisations to fund his efforts to resolve poverty in Bangladesh, starting with the iconic Grameen Bank in 1983.
Later on, the World Bank and the US government became key supporters, and with Ford Foundation and other organisations began to fund Grameen Bank-style microcredit institutions right across the developing world. Pretty soon the poor in almost all developing countries were able to access as much microcredit as they wanted. Massive poverty reduction success seemed just around the corner.
But it didn’t work. In a growing number of countries where microcredit made significant inroads, it is now a development model best known for plunging very large numbers of the poorest into even deeper debt and poverty than ever before. The poorest are all too easily seduced by predatory lenders into taking out way too much debt. High interest rates proved a real burden, and aggressive loan collection techniques spread fear into many poor communities. Microcredit institutions and their supporters always argue in favour of limited regulation, hence little is done to legally prohibit or punish over- lending to the poor.
Thanks to a number of “boom-to-bust” episodes precipitated by over-lending, microcredit has come to be rightly known as the developing world’s own “sub-prime” financial disaster, with “meltdowns” in Bolivia, Bosnia, Pakistan, Nicaragua, Morocco and most catastrophically, in Andhra Pradesh state in India, site of 250 000 suicides by indebted farmers.
Even in Bangladesh, where it first became a ubiquitous feature in the life of the poor, it is now accepted that there is no genuine evidence of any positive impact on poverty thanks to microcredit. In the site it started in the late 1970s when Yunus made a personal loan to an informal trader – the village of Jobra near Chittagong – today the local population is just as poor as ever, and the only change of any note is that a very significant section of the community is now in very serious debt to the local microfinance institutions.
Most recently, spectacular microcredit profiteering was also taking place in Mexico, Nigeria, Bosnia and India. All told, the accumulated evidence produced by independent researchers and evaluation experts now shows conclusively that microcredit simply does not reduce poverty and deprivation in the longer run. Not surprisingly, the microcredit model has come seriously undone all across the globe.
However, we have perhaps just witnessed one of the most appalling microcredit-related disasters of all in South Africa. Extreme over-indebtedness by workers apparently helped precipitate the Marikana massacre on August 16. Miners employed at Lonmin’s mine were gradually seduced by local lending institutions into accessing far too much microcredit.
Planning Minister Trevor Manuel is just the highest-profile official to recognise, too late, that too many mineworkers depended upon micro-loans and that very high repayment levels left many destitute after their pay-cheques suffered deductions. This is not specific to the mineworkers, so according to Finance Minister Pravin Gordhan, “Predatory lending creates overly indebted consumers‚ threatens livelihoods‚ and can trap people in a cycle of poverty.”
With far too many miners apparently forced into spending more on interest payments each week or month than on any other household outlay, no matter how hard they tried, they simply could not prise themselves away from taking out a microcredit in advance of payday. With such micro-debt problems mounting to intolerable levels in recent years in the mining community, Marikana miners felt that they had no other option but to demand a very large pay increase in order to try to clear their accumulated micro-debts. The miners’ desperation and anger was palpable, Lonmin refused to back down, and a massacre ensued.
The Marikana miners are part of a long-standing migrant labour system that, often through a company shop, kept workers in debt as part of their exploitation. Their extreme anger at indebtedness is understandable, and the microcredit institutions – including UBank, an institution owned by the National Union of Mineworkers and the Chamber of Mines – should be held responsible.
And as is often the case after microcredit is granted, Marikana miners were not meaningfully helped to cut debts through special programmes of repayment and counselling. So long as a miner’s salary could very easily be tapped in via a stop-order to repay any outstanding micro-debt at high rates of interest, and the Christmas bonus paid outstanding arrears at year-end, the microcredit institutions had no desire to impose reasonable limits on individual indebtedness.
There is no evidence of government bodies specifically regulating microcredit institutions so as to restrict their lending activities to appropriate levels. The growing crisis of unsecured credit non-repayment is reflected in worsening ratings for the most risky of local financial institutions. Consumer debt is reaching record levels, encouraged until recently as a short-term economic stimulant.
Microcredit was sold to the world by Muhammad Yunus and his acolytes as a simple, and simply fantastic, intervention that would help the poor escape their poverty. Perhaps nowhere more than in the horrific experience of the Marikana miners has such faith been shown to be misplaced, and the potentially catastrophic results of desperation-level micro-debt revealed with such awful clarity.
Dr Milford Bateman is Visiting Professor of Economics at the University of Juraj Dobrila Pula, Croatia. He authored Why Doesn’t Microfinance Work? and tomorrow lectures at 5.30pm at Wits’s John Moffat Building auditorium. To attend, RSVP to [email protected]