What’s Wrong With Current Solutions?
Today, arguably no proposed solution to global poverty is more in vogue than microfinance. Pioneered by Bangladeshi social entrepreneur Muhammad Yunus and his Grameen Bank (for which he won a Nobel Peace Prize), microfinance involves the lending of small amounts (typically no more than a few thousand dollars) to impoverished people, which they can then use to start businesses and lift themselves out of poverty. By many accounts, microfinance has been a success — globally, the industry is estimated to bring in between $60–100 billion, and Yunus’s Grameen Bank has a 98 percent loan recovery rate. Billionaire philanthropists such as George Soros and Pierre Omidyar have flocked to the idea, and microfinance has been widely hailed as the philanthropy of the future.
Microfinance is often cited as an especially promising way to empower women, and thus much of its attention has been targeted towards women in developing nations. 97 percent of Grameen’s clients are women, and altogether women make up 85 percent of the poorest borrowers worldwide. This is largely because women are more likely to borrow due to a lack of access to other forms of credit, have higher rates of repayment, and the loans given to them are often more likely to have greater benefits for the wellbeing of their families.
However, despite its much-touted potential and apparent success on paper, microfinance is by no means the silver bullet for gender equality that many believe it to be. In fact, a deeper look at the longer-term impacts of microfinance on borrowers reveals a worrying picture. On a basic level, microfinance can create a cycle of debt that traps poor people, especially women, and holds them in poverty rather than offering them an escape. Many individuals, who lack the education necessary to make informed business decisions, are enticed by quick and easy access to credit and take the loans without considering the long-term impacts, such as the fact that it may take them 10–20 years to repay their debt. Often, these loans end up being used to start small, largely unsustainable and entirely non-scalable enterprises that can barely scrape out enough revenue to feed the owners, let alone repay their loans. Consequently, many poor people are forced to sending their children to work, selling land and other property, and even taking out more loans to cover existing debt.
Compounding the problem is the fact that as microfinance has grown in international popularity, increasing numbers of credit institutions are entering the industry but treating it as more of a profit-making business than a humanitarian effort. The introduction of the profit motive into poverty alleviation can have disastrous effects. Interest rates are often exorbitant, with most falling between 30 and 60 percent annually. Although this is less than what individuals would expect to pay from most traditional moneylenders in poor countries, these rates are nevertheless far too high for many people to repay. Debt collectors for microcredit institutions are often relentless, harrassing borrowers to sell off what little assets they have and in some cases resorting to physical violence to collect payments. The coercive tactics used by many microcredit institutions have led Yunus to condemn such organizations as “the new loan sharks”, but this hasn’t stopped them from seeking to profit off of poverty alleviation.
For women, the negative impacts of microfinance as it exists today are especially significant. Because women are the primary receivers of microloans, they are disproportionately impacted by all of the above factors. In addition to this, they often are denied basic control of these loans in the first place — in many developing countries that have deeply-engrained patriarchal structures, loans given to women often end up being controlled by the women’s husbands, brothers, or other male figures. This occurs in almost 90 percent of cases, and results in men using the loans for themselves, forcing their brides’ families to pay larger dowries, or even forcing the women to take out more loans for the men to abuse.
All this is not to say, however, that microfinance is a lost cause. It is a fundamentally well-intentioned concept, and has vast potential to improve the lives of millions of women if paired with the right models of ownership and anti-poverty approaches that get to the root of the issue rather than treating the symptoms.
