Commentary  Small loans (to the poor), big results (for the rich)

Microfinance covers up some crooked dealing


Peter Shyba was not wrong when he wrote that “microfinance has become one of the biggest buzzwords of this decade” (“Small loans, big results,” Health & Education, September 30). Microfinance has indeed been touted as a magic bullet with real potential to solve that nagging question of poverty. Stories have been recounted, repackaged, and retold to convince the whole world of their success. So-and-so obtains such micro loan, and within X number of months, she’s saved Y amount of money and builds a house of her own. The story is easy to digest, thus its success in convincing people: provide the poor needed capital, and they’ll climb out of their wretched lives.

In and of itself, the idea seems benign and noble. However, we don’t live in a vacuum. If only we could just fit the whole world into our neat little idea, but this is not the case. Microfinance is now dominated by big financial institutions. It has turned into a macro-racket: a $30-billion market, with big players like Crédit Suisse, Morgan Stanley, the French insurance group AXA, and the Blackstone and Carlyle groups, just to name a few. The microfinance industry’s high average portfolio yield – 22.3 per cent annually, according to one study – coupled with the appearance of helping the poor has attracted these multinationals. For them, microfinance is a goldmine.

One might reply: “What’s the problem? It’s alright for big businesses to make a lot of profit if it means more capital is available for the poor.” This is akin to saying that it’s all right for businesses to build sweatshops in poor countries if it means providing jobs. This mentality is the exploiter’s; it takes advantage of the desperation of the unemployed poor.

The penniless poor, eager to improve their life but lacking means, gracefully accept the loans only to taste their bitterness when the installments are due. Most of us here don’t even read the small-print clauses of loan agreements. It’s no surprise Bangladeshis living in mud huts don’t either.

Microcredit is a “new kind of debt trap,” as Bangladeshi philosopher and activist Vandana Shiva says. It scoops up hundreds of millions of people who have so far been out of reach from the snare of the capital and forcefully – with tricks and sugarcoated loan packages – ties them to the system. It sucks people into a permanent dependence on credit.

The secret to microfinance’s high portfolio yield lies in its interest rates – 20 to 25 per cent. This interest casts a heavy shadow upon borrowers’ household. To meet their instalment payments, they are compelled to work from dawn to dusk, dragging along their whole family – spouses, children, old parents, siblings – to engage in feverish production. Because most borrowers depend on voluntary family labour, there aren’t any labour standards. Workers’ safety, restrictions on child labour, overtime pay, holidays, and minimum wage are concepts alien to this system. This is the only way a household could produce enough to meet the payments. At the end of the day, microcredit is creating micro-sweatshops.

Muhammad Yunus might have been sincere in his endeavour, but I am not interested in a psychological analysis. Good intentions are not enough to justify folly. Microcredit, like other buzzwords such as “sustainability,” has been co-opted by the very system that it wishes to redress. It’s a band-aid solution that has become a new tool of exploitation.

I can already hear someone replying: “It’s better than nothing.” But there is another option. We don’t have to reconcile ourselves to choosing between false solutions and nothing. We can, and we need to, move beyond capitalism. I don’t have the space to lay out my ideas about what needs to be done. But let’s at least take the first step of thinking beyond capitalism. That would suffice for now.

Ted Sprague is the pseudonym of a Masters II Chemical Engineering student. He can be reached at

Due to an editorial error, an earlier version of this article stated that Vandana Shiva is Bangladeshi. She is in fact Indian.