Microfinance is now a mega-mess

by Wade Rathke

New Orleans   A little less than a decade ago, in mid-2011, ACORN International stirred up a bit of a hornets’ nest by opposing the international development consensus in a series of reports we issued that questioned the value of microfinance as a poverty reduction measure. Boiled down, we stated flatly, that poverty cannot be cured by debt. The model was neoliberalism at its worse.

At best, microfinance was a small-scale subsistence job creation program, but it would not reduce poverty and was not sustainable. I had seen their towering skyscrapers in Bangladesh’s capitol of Dhaka and in a number of countries observed the legions of daily payment collectors that microfinance depended on. We were horrified at the exorbitant level of interest charged, even as international donors subsidized the development and growth of the industry. When some of the microfinance outfits in Asia and Latin America took the model private, abandoning even the pretense of social enterprise, that was the final bridge too far for ACORN to cross. Despite the fact that we predicted the industry’s demise and greet its increasing imperiled situation without surprise, we take no pleasure in the news because of the harm its failure will inflict on the same people it presumed to help.

The global pandemic has exposed the industry’s weakness, despite lending portfolios estimated at $124 billion. In-person cash payments have plummeted with shutdowns and the economic devastation. According to the Economist, “More than two-thirds of MFIs [as microfinance institutions are known] have cut lending, often by at least half. Nearly one-third do not have enough cash to meet outflows this quarter.” They also hold some of the industry’s problems responsible as “…for-profit lenders, some of which demand land titles as collateral, charge extortionate rates and use heavy-handed tactics to collect payments. From Congo to Kosovo, scandals have surfaced.” Like we said.

The story from Cambodia, as one example, is harrowing. The average MFI debt is $3,320, twice the annual GDP per person with 30% of Cambodian households holding a loan. The central bank put an interest cap of 18% in 2017, and lenders cut the number of loans less than $500 by 48%, claiming through their association that they could only turn a profit on loans of $2000 or more. Such a loan is more than the average person makes annually, so this may be widespread, but clearly MFIs in Cambodia have made it no country for poor families. Requiring land titles according to researchers has pushed the landless from 32% to 51% in 2016.

The MFIs seem to think that the solutions to their global problems lie in bailouts from international donors and national governments. Perhaps, but there is no bailout in store for millions of low-income borrowers drowning in debt with the collectors at their door. This crash is falling on those least able to crawl out from under. Who will take responsibility for them?


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