Misery and microfinance
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JUST as 2016 was taking its first nascent breaths, news was released about the imminent establishment of the Pakistan Microfinance Investment Company. According to newspaper reports, this new institution would be set up in partnership with the UK Department of International Development, the German Development Bank and the Pakistan Poverty Alleviation Fund.
The structure of the proposed company is currently under study by Pakistan’s finance ministry, which has announced that the country’s microfinance needs are expected to increase significantly in the next several years. The foreign partners are expected to contribute the funds required to meet these demands.
Everyone in Pakistan (and abroad) knows that Pakistan is a poor country and that poverty alleviation has to be a priority if the nation is to progress. As the proposal for the investment company reveals, microfinance — the disbursement of small loans to the country’s poor — is seen as a means of alleviating poverty. Superficially, this seems like a positive development, a concrete step by an apathetic government to actually do something about a problem whose evidence is seen in the haplessness of its many suffering citizens.
The regional neighbourhood of Pakistan further attests to the idea that microfinance will deliver its poor; the much-touted successes of Bangladesh’s Grameen Bank still echo in the ears of many development economists, and everyone is eager to believe that bankers will be able to solve a problem that nearly everyone has failed to crack.
It is a false promise. As Jason Hickel, an anthropologist at the London School of Economics, wrote recently in an article for the Guardian, “microfinance doesn’t work”. His views are echoed by economist David Roodman, whose book Due Diligence proves that the “best estimate of the average impact of microcredit on the poverty of clients is zero”, a finding supported by a review of other microfinance-based poverty alleviation projects that have found that absolutely no evidence exists that they are able to actually lift their users out of poverty.
Microcredit loans simply end up wrapping the poor in layers of more and more debt.
In the Guardian article, Hickel takes Roodman’s argument further, holding that not only does microfinance fail to help the poor, it actively hurts them. This is because the central mechanism of any microfinance project is to increase the consumption of the poor by giving them a small loan. As data from South Africa shows, this does happen; nearly 94pc of microfinance users there were found to be using the money to purchase something.
The result, of course, is that they are unable to pay off previously existing debts, or more hopefully to use the money to generate new income. The unsurprising consequence is that microfinance loans simply end up wrapping the poor in layers of more and more debt, actually pushing them further and further into poverty.
Even the success story of the Grameen Bank is now being exposed as an overblown claim. According to a 2007 study conducted by Q.K. Ahmad of Dhaka University, 1,189 out of 2,501 people surveyed could not pay back their microcredit loans on time. Further, Ahmad found that nearly three quarters of the defaulters had to take another (usually very high interest) loan from a moneylender or sell personal assets to actually pay off the loan.
Unsurprisingly, a World Bank study from 2009 found a fall in membership in microfinance ventures. According to Anu Muhammad, the author of Bangladesh: a model of neoliberalism, the true success of microfinance ventures such Grameen Bank has not been in poverty alleviation as claimed but rather in “corporate expansion and the development of a new form of financial industry”.
Grameen’s corporate offshoots in Bangladesh include Grameenphone, Bangladesh’s largest cellular phone company, three quarters of whose shares are owned by Norwegian cellular giant Telenor. Conveniently, the Grameen Bank network of borrowers was used to pull in Grameen Bank members into the Grameen phone market. The addition of Grameen Danone Foods and Grameen Veolia Water are two further examples of how the microfinance ‘brand’, whose objective was now proven to be a faulty claim of poverty alleviation, is really just a front for corporate marketing for the very poor.
When the poor buy more, whether it is a cellular phone or a car or anything else, they do not cease to be poor. Indeed, the fact that they take multiple and often more and more high-interest loans to support this consumption means that they pay more for the same thing than, say, a middle-class consumer; they are enslaved forever by the goods that they purchase. The only winners in the game are the lenders, who, according to Hickel’s research, can sometimes charge up to 200pc interest.
When the government is the lender, the loan and its conditions abbreviates the freedoms of poor citizens, ensuring their political compliance with whichever administration grants them loans. In worst-case scenarios, the indebted poor can no longer bear to live under the burdens; a 2012 investigation found hundreds of suicides among farmers in India to be linked to microfinance ventures that had crippled them with debt.
It is unknown whether any of this evidence against the use of microfinance has been considered by those involved in the creation of the Pakistan Microfinance Investment Company. One wonders if its purveyors have come across the research presented in a recent book called Just Give Money to the Poor: The Development Revolution from the Global South. Its authors, David Hulme, Joseph Hanlon and Armando Barrientos, consider a variety of data to come to the stunning conclusion that the best way to actually help the poor and to alleviate poverty in general is to simply give them cash without strings attached and let them decide what they would like to do with it.
When the individual capacity of the poor to improve their own conditions is given some respect, poverty magically is reduced. Those involved in setting up the Pakistan Microfinance Investment Company may want to capitalise on disbursements coming from the UK or Germany by setting up a new investment bank; they should not propagate the deception that its purpose is to provide salvation to Pakistan’s poor.
The writer is an attorney teaching constitutional law and political philosophy.
Published in Dawn, January 27th, 2016
