Unveiling the Dark Side of Microfinance

For many, microfinance is a celebrated concept to tackle poverty. While many others also argue against the idea that it would only sustain poverty. The history of microfinance is not long. Its modern-day use became famous in the 1970s when Professor Muhammad Yunus started a microfinance project in remote villages of Bangladesh to alleviate poverty. After 30 years, Professor Yunus and Grameen Bank were awarded Nobel Peace Prize for their contribution to poverty alleviation.

After the early success of the pioneer, many microfinance institutions and projects flourished in Bangladesh, intending to alleviate poverty and develop the community. But most of them quickly became ‘loan sharks’ due to their policy and cons of the concept. Grameen Bank also gained the same notoriety locally. Moreover, as loan disbursing became a profitable business, corruption also loomed in this sector. Most of these issues are quite unfamiliar to people, especially from the first world, as the concept and sector have gained a remarkable reputation. But let’s focus on the sector’s ‘dark’ and ‘least-known’ aspects. So, what are the dark sides of microfinance after 40 years of mainstream practice? As Bangladesh and Grameen Bank are the poster boys of microcredit and microfinance, let’s look deeper into them for evidence.

The concepts of microcredit and microfinance are inherently problematic. As the practice is still younger, considering the last five decades only, the concepts garnered popularity and respect quickly, especially after aligning themselves with women’s empowerment. But, as the practice continued, scholars and researchers started to come up with opposing evidence. Anthropologist Jason Hickel came up with an exact criticism. According to him, small credits only increase debt for poor people, which is unsustainable. Hickel argued that there is no clear evidence of positive impacts. Hickel also believes that the concept became famous as the rich world subscribes to it because they thought they could eradicate poverty from the third world without any extra cost through these projects. In short, a revolution without a class struggle. Hickel also encompassed loan sharking, short-sightedness, debt stress, and consumption issues related to the concept.

Studies also found that the failure is miserable even though the sector scaled up in the last five decades. In South Africa, 94% of cases are failures, while Bangladesh also suffers from overborrowing and lack of repayment issues. Prominent critical activist-scholar Professor Anu Muhammad also argues that microfinance increased NGO corporatization, unregulated loan disbursement, and the vicious circle of debt.

So, what does the empirical field say if the concept is heavily criticized in the realm of theory? ‘Loan shark’ has become synonymous to microfinance institutions (MFIs) in Bangladesh. The MFIs enjoy an unregulated disbursement power, as pointed out by Anu Muhammad. So, they provide loans at high-interest rates unaffordable to most poor. For Instance, Grameen Bank provides its main loan package at the interest rate of 20% – a number even higher than commercial banks. It also has a notoriety for collecting the repayments using unorthodox methods such as shaming, harassing, threatening, and cursing in public. There are even incidents where the victims had to sell their properties and organs to repay the payments. Around 10% of microcredit borrowers sell their land to repay, while 72% of others borrow money from here and there to repay in Bangladesh.

However, as mentioned previously, citing Hickel that there is no clear evidence about the positive impacts, what about Jobra village’s success story? Jobra village was the poster for Grameen Bank about their success in microfinance. The world witnessed Sufiya Begum from the village that alleviated poverty with the help of microfinance from Grameen Bank. But Tom Heinemann’s documentary ‘Caught in Micro debt’ suggest that it was all a Grameen ‘Folklore’, and Jobra gained no substantial benefit from them. All these were arrangements to display a ‘fake’ performance to the world. Instead, Sufiya died poor, and her daughters are still struggling. Recently a local media report also visited Jobra and found that people even dissent about Professor Yunus and Grameen Banks’ broken promises.

Apart from creating folklore, Grameen- an umbrella of many initiatives, also suffers from corporatization and corruption. Grameen Telecom faced 107 cases filed by its trade union and had to settle them recently by paying 437 crore taka as a settlement claim for denying profit-sharing. Corporatization of ‘Non-Profit’ brought greed and exploitative intention among the management. Grameen Telecom initially tried to stop its employees from forming a trade union- a democratic right. Later, the management also tried to sack the leadership. The trade union was formed when Grameen denied its employees from sharing profit violating existing laws.

Apart from denying profit share, Grameen Bank and Professor Yunus also garnered criticism for running the organization like personal businesses. Professor Yunus became 60 years old and still refused to retire from the director post. The matter also went to court, and the court had to relieve him from his duty due to his age for the post. The incident also created a drift between Professor Yunus and the incumbent regime of Bangladesh.

Moreover, there are cases under trial against Grameen and Professor Yunus on allegations of tax evasion and diverting funds for personal use. National Bureau of Bangladesh filed a tax evasion of $1.5 million against the Noble laureate in 2015.

Apart from Grameen, situations in other microfinance are more or less the same. Even though they are not as gigantic as Grameen, they are often accused of selling unsustainable loans and transforming microcredit into a profitable business. There are also disputes over controlling the management and ‘ownership’.

In a nutshell, Microfinance is an ‘over-hyped’ solution to global poverty. Even though it impacts poor lives in the short term, the sector is largely consumed by corruption and irregularities that undermine the sector’s capacity. A restructure and consolidation of concepts in both theory and practice is much needed to overcome the loopholes of microfinance.

[Photo by BRAC, via flickr]

*Doreen Chowdhury is an aspiring author and analyst. She is currently pursuing her Doctoral studies at University of Groningen. Her areas of interest are Comparative Politics, Globalization, South Asian Studies and Migration Studies. The views and opinions expressed in this article are those of the author.

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