The economic impact of war in Ukraine will tighten the screw on people who have endured assault for decades under a lauded financial regime, says Grimot Nane.
Russia’s invasion of Ukraine has precipitated a threat to credit and finance within the free-market, global economy comprising a sudden paucity of necessary credit, an increasing cost of debt, the certainty of defaults on repayments for struggling economies, the currency wars, and the underestimation or underreporting of inflation rates. Nevertheless, far away from the fears of impending sovereign macroeconomic troubles are at least equally at-risk, but overlooked, concerns of the once-vaunted, free-market practice of microfinance (MF) – designed, as it was, for the world’s poorest people in the Global South.
MF’s logic is simple. Borrow $100 at 30-200% interest, invest it; yield a profit; then re-invest. But what business yields 30-200% profit? Common knowledge informs us debt-interest grows faster than incomes and microenterprises are the riskiest to bank. Yet, the expectation of the mainstream is, with individual discipline and effort, MF will lift millions out of poverty. We note, however, that no industrialised nation used the MF model to build its economy. Jobs, not microenterprise, lift millions out of poverty.
Nevertheless, the mainstream free-market flotilla takes in the rafts and coracles of MF borrowers alongside the liners and battleships of banks and big business. But how do the motives and methods of the Uber rich and peasants coexist within the free market space?
How do the motives and methods of the Uber rich and peasants coexist within the free market space?
Economist, Ha-Joon Chang, explains that any concept like MF, that supports the free-market, gains easy currency in the mainstream despite contradictions or differences with the doctrine. So, we have entrenched Too-Big-To-Fail businesses enjoying massive support from government and central banks sailing alongside precarious Too-Small-To-Consider penny hustlers whose only experience of government is the rare visit from politicians seeking re-election. They just don’t have the same access to a port in a storm.
Profit-friendly non-government organisations and commercial interests manage the MF markets – governments are not supposed to be involved. However, consistent with Mariana Mazzucato’s work on public value, governments generally have only intervened when the MF markets fail, and the public value created by MF is derisory.
Non-government organisations and commercial interests manage the microfinance markets – governments are not supposed to be involved.
The pioneering Bangladeshi Grameen Bank is a massive MF organisation that provides microcredit to poor traders. Its founder, Muhammad Yunus, won a Nobel Peace Prize, with celebrities, billionaires, and world leaders hailing him as a grand champion of the poor. In 1997 he declared: “Microfinance will eradicate poverty in a generation.” The concept was promising and persuasive. Yunus made the history-defining claim, “A Grameen-type credit programme opens up the door for limitless self-employment, and it can effectively do it in a pocket of poverty amidst prosperity, or in a massive poverty situation.”
This untested claim sold microfinance and emphasised self-help and profit. But viable self-employment does not exist as an unlimited resource in the real world and its oversupply does not increase demand.
Alas, the Grameen Bank and similar institutions are projects often vulnerable to:
- intractable organisational, political, and cultural problems;
- external economic shocks; and
- predatory behaviour.
Microfinance proponents make the inordinate assumption that the undeserving poor can achieve financial independence for themselves with petty trade, high-interest credit, and government absence.
The current external economic shock of the Ukraine war has meant cuts in funding for MF and high inflation are already taking their toll on the poor. However, MF proponents make the inordinate assumption that the undeserving poor can achieve financial independence for themselves with petty trade, high-interest credit, and government absence. There is no argument that we live in a world developed and governed by high finance and big government.
Poor people regard MF, no matter how ostensible, as preferable for personal progress to their government’s neglect. The necessity for credit is desperate, its provision is lacking and difficult to access. Accessibility to credit is thus the key reason behind MF’s popularity. With collateral, especially from formalising community lands, getting credit becomes easy. Yet, easy MF credit often comes with debt ignorance and high rates of repayment defaults.
Users of MF are the least educated, least supported, and least skilled in society. Many borrowers are illiterate, use thumbprints for signatures and are easy to cheat or overcharge. Predictably, they are easy prey to predatory lending and false selling. In the MF arena, most people called entrepreneurs are anything but entrepreneurs. Proponents conflate the necessities for survival where options are absent with the specious assumption of entrepreneurial creativity.
So as a fighting chance of economic success or empowerment for the poor, MF clearly sits near the least helpful facility for overcoming poverty.
How many entrepreneurs has MF freed from poverty? What proportion of entrepreneurs remain in poverty or suffer worse poverty after taking on MF loans? These questions interrogate the promises of MF to poor borrowers.
The Grameen Bank provides a case for its success. It lent $10 billion in loans over three decades to more than eight million women, and 97% repaid their loans. But paying back loans is not evidence of triumph over poverty. For example, many Nigerians in diaspora have had to bail out their families back home from losing family lands to MF institutions. This also counts as paying back.
Over decades, 250,000 to 300,000 people have taken their own lives, evidently driven by a mix of the loss of long-held ancestral lands, high-handed debt collection, public humiliation, and spiralling debt.
Furthermore, Grameen Bank and MF institutions on the subcontinent operate in the so-called Suicide Belt, where over decades, 250,000 to 300,000 people have taken their own lives, evidently driven by a mix of the loss of long-held ancestral lands, high-handed debt collection, public humiliation, and spiralling debt. The pattern of suicides and other extreme behaviour is observable wherever MF emerges in the world.
Once funded by high-finance sponsors, Yunus has distanced himself from the overt predatory practices of MF operators and their consequences – including worsening poverty – as not what he intended.
The attempt to financialise the poor is not working and is unlikely to work in future. It contradicts the very promise of lifting people out of poverty. And the global economic shocks of the Ukrainian war will hit the poorest side of the free-market hardest. What future will MF have when the war ends?