The truth about microcredit

From neoliberal fairy tale to predatory lending empire

A girl holds a goat and a sign reading
The non-profit community development Ssamba Foundation runs a microcredit-supported goat donation program in Uganda. PHOTO:
Share with your friends


In 1976, Bangladeshi economist Dr. Muhammad Yunus came up with the notion that poverty could be solved in developing countries with “microloans” — lending small amounts of money to poor people to start businesses.

Yunus launched Grameen Bank, a non-profit which made microloans to groups of poor women — declaring that poverty would be only a memory by 2030. Over 45 years later, a profit-based industry has spread around the world and the poverty of millions is made worse by unpayable loans.

Yunus and Grameen won a Nobel Peace Prize in 2006. The bank had switched to profit-making in 1983. The World Bank, U.S. Agency for International Development, and other “development” agencies began pushing the creation of for-profit microfinance institutions, often funded by public tax dollars. These institutions can make unregulated loans without collateral and charge much higher interest rates than banks. Regulated banks in the U.S. started dropping small business loans after the 2008 recession, investing in more profitable microloan companies instead.

Today, microfinance is a huge industry. According to the Investopedia website, the global market is expected to reach $394.8 billion by 2027. Yet contrary to the hype, developing countries with widespread use of microloans are still deep in poverty.

The fiction vs. the facts. In 2000, Grameen Bank made loans of $700 to rural women in Bangladesh to become “Grameen phone ladies.” The women made income by renting time on cell phones to rural people. As they repaid their loans, more women could supposedly get loans to become phone ladies and soon the village would rise out of poverty. Everyone would live happily ever after.

Donations poured in from feminists and social welfare activists, who were led to believe these schemes empowered poor women. New NGOs popped up and older ones expanded. Neoliberals replaced U.S. foreign aid with microfinance — pushing the myth that anyone could become a business success.

In reality, as more women in the village get loans and buy phones there are fewer customers for each phone lady. Markets become saturated and lack of transportation limits the ability to reach new ones. Then a large cell phone company moves in and sells cheaper phones to the villagers — a given under the laws of capitalism.

The women are left with shrinking income but still have loans to repay. Poverty expands as financiers squeeze the poor with exorbitant interest rates.

Often, microloans trigger a downward spiral when money is spent on a family emergency, and a new loan is needed to pay the first one. Interest rates can reach 50, 60 or even 100% annually. Deep in debt, the family must sell possessions, even homes and land, to repay loans to coercive enforcers.

Microloans feed false hope. The evidence that microloans don’t free people from poverty can be seen in the statistics of countries that have been saturated with them for decades. Bangladesh and India, for example, still have widespread crushing poverty. In spite of India’s rapidly growing economy and wealthy class, more than half its people live on less than $2 a day.

A study by the World Bank reported the failure rate of micro-businesses in Bosnia was 50% in the first year. In the Indian state of Tamil Nadu only 1% survived after three years, but loans still had to be repaid. Grameen Bank’s very first client, Sufiya Begum, died in abject poverty in 1998 after all her business attempts over 30 years came to nothing.

From 2015 to 2018, 11,995 farmers in India committed suicide over unpayable loans and losing their farms. In Jordan over 2,000 people are in jail for debts as small as a few hundred dollars.

Most projects that survive are started by women with skills and education who are above poverty level and already have jobs or small businesses. Thus the loans benefit a few better-off folks, not those at the bottom.

In many poor countries, microfinance projects disrupt existing communal systems of villages, and especially hurt the very poorest, elders, and the disabled. Informal safety nets disappear as people compete against each other. Then, big business moves in and crushes the local sellers. This doesn’t end poverty, but does spread capitalism by luring new victims into the consumer credit system.

Despite media exposure of microcredit’s exploitation, large U.S. banks — Wells Fargo, Bank of America, Citi, Chase, and others — have set up foundations to spread this scam into heavily indebted European countries like Greece.

In a U.S. study of new borrowers from the Grameen America nonprofit, measures like “credit worthiness” and self-esteem improved, but income did not increase. Wages were just replaced by small business receipts. Grameen America loans money in 15 cities. Jennifer Lopez was recently named national ambassador of Grameen America to attract Latinas to “entrepreneurship.”

A dream come true for capitalists. Microfinancing is a way for imperial powers to infiltrate the economies of poor countries, retard development, and help bankers and unregulated microfinance institutions tap into super-profits.

The phenomenon is widespread in Latin America and Africa. Money is pumped into thousands of tiny businesses such as street vendors, but not into larger production enterprises that would develop technology, ease workers’ tasks or boost labor productivity. The microloan “entrepreneurs” are really indentured servants of the institution that gives them loans for piecework — with no wages or benefits.

The microfinance fad feeds the false hope that people can rise from poverty through self-help and “market-based” solutions. It is opposed to the alternative of uplift through collective working-class struggle.

Laboring classes worldwide are fighting for a better future based on equality, wealth redistribution, and socialism. Neoliberals would love to see these radical aspirations sink under a flood of microloans and false promises that everyone can go from rags to riches under capitalism.

The real solution to poverty is socialism. When billions are desperate for food, shelter, clean water and healthcare, the answer is not microloans but the overturn of an economic system in which a handful of people control all the wealth.

The above is an updated adaptation of the 2014 FS article Microcredit: good cause or neoliberal fairy tale?

Share with your friends