Microfinance, the practive of lending the desperately poor sums that are tiny but enough to allow self-sufficiency, has recently been lauded as one of the most hopeful development strategies for global poverty, and its architects awarded the Nobel Peace Prize. However, in the country that served as microfinance’s first laboratory–India–the practice has taken a perverse and fatally counterproductive turn, as debt-saddled farmers began killing themselves:
More than 70 people committed suicide in the state from March 1 to Nov. 19 to escape payments or end the agonies their debt had triggered, according to the Society for Elimination of Rural Poverty, a government agency that compiled the data on the microfinance-related deaths from police and press reports.
Andhra Pradesh, where three-quarters of the 76 million people live in rural areas, suffered a total of 14,364 suicide cases in the first nine months of 2010, according to state police.A growing number of microfinance-related deaths spurred the state to clamp down on collection practices in mid-October, says Reddy Subrahmanyam, principal secretary for rural development.
“Every life is important,” he says.
On Nov. 8, police arrested two managers of lender Share Microfin Ltd. on allegations of abetting another suicide, this one of a 22-year-old mother. Share Microfin didn’t respond to requests for comment on this story. As India struggles to provide decent education, health care and jobs to millions still locked in poverty, microlending — the loaning of small sums to the world’s neediest people to help them earn a living — has taken a perverse turn.
Microcredit has become “Walmartized” by unrestrained selling of cheap products to the poor, says Malcolm Harper, chairman of ratings company Micro-Credit Ratings International Ltd. in Gurgaon, India.“Selling debt is like selling drugs,” says Harper, 75, the author of more than 20 books on microfinance and other topics. “Selling debt to illiterate women in Andhra Pradesh, you’ve got to be a lot more responsible.”
K. Venkat Narayana, an economics professor at Kakatiya University in Warangal, has studied how microfinance lenders persuaded groups of women to borrow.
“Microfinance was supposed to empower women,” he says. “Microfinance guys reversed the social and economic progress, and these women ended up becoming slaves.”
India’s booming microlending industry is part of a global phenomenon that began as a charitable movement but now attracts private capital seeking growth and high returns.
Banco Compartamos SA, a former nonprofit that’s now the largest lender to Mexico’s working poor, raised about $467 million in its 2007 initial public offering. The August IPO of SKS Microfinance Ltd., India’s biggest microlender, drew further attention to the industry. SKS began operating in 1998 as a nongovernmental organization led by Vikram Akula, 42, an Indian-American with a Ph.D. in political science from the University of Chicago. The company raised 16.3 billion rupees by selling 16.8 million shares at 985 rupees each. SKS shares peaked at 1,404.85 rupees on Sept. 15. As of Dec. 28, they’d fallen to 652.85 rupees.
On Oct. 15, the government of Andhra Pradesh imposed restrictions that bar microlenders’ collection agents from visiting borrowers and required companies to get local authorities’ approval for new loans. The rules have crippled lending and repayments. Loan collection levels in the state have dropped to less than 20 percent from 98 percent previously, according to an industry group.
The upheaval in Andhra Pradesh is a long way from the vision of Muhammad Yunus. The former economics professor won the Nobel Peace Prize in 2006 for his pioneering work in Bangladesh providing small sums to entrepreneurs too poor to get bank loans.Yunus, 70, discovered more than three decades ago that when you lend money to women in poverty, they can begin to earn a living, and most of them will pay you back.Yunus started the Grameen Bank Project in 1976 to extend banking services to the poor. Since then, it has lent $9.87 billion and recovered $8.76 billion; 97 percent of its 8.33 million borrowers are female.
Yunus says he’s not against making a profit. But he denounces firms that seek windfalls and pervert the original intent of microfinance: helping the poor.The rule of thumb for a loan should be the cost of funds plus 10 percent, he says.“Commercialization is the wrong direction,” Yunus says, speaking in a telephone interview from Bangladesh’s capital of Dhaka. “An initial public offering is the triggering point for making a lot of money personally as well as for the company and shareholders.”
Any system of welfare or charity needs experiment and tweaking to achieve maximal effect, and micro-credit should not be abandoned at this juncture, but its practices must be reexamined and modified. Such might sound callous to say this when people are setting themselves on fire; but it is more cruel to seal off entirely a path by which more of the poorest people of the world, the poorest in history, might improve their lot.