The spirit of Muhammad Yunus is taking yet another beating. Chuck and I have written in defense of the concept and practice of microlending before, despite its flaws; chiefly, that there are inscrupulous microfinance companies that take advantage of the poverty-stricken. Under these conditions microlending is just one more way to take advantage of the world’s poor.
Lending money at interest rates at or near 100 percent (or more) to illiterate poor looking to better their lives through entrepreneurship is, most decidedly, one of the more disgusting perversions of capitalism. And there is a very real threat that when a person lends money through microlending sites like Kiva.org it may go to round out the pockets of a lender in a far off land who is becoming fat from the misery of his debtors. At issue is one of the fundamental principles of microlending: that if you lend money to a member of a traditional society which maintains order through an emphasis on family honor, that person is going to pay you back. Her or his family name is on the line.
Right now in the Andrha Pradesh state if India, the BBC is reporting that exploitation of family honor by microlenders is being blamed for the suicides of 57 people in the last few weeks. Responsibility for 17 of those are being laid at the feet of one company, SKS Microfinance. The company, the largest microlender in India, has become an emblem of how the small gains afforded the individual borrower by microfinance can be exploited for by the lender for enormous profit.
In July, SKS took the traditionally non-profit and non-governmental-organization model to the markets when it went public with an IPO that was valued at $350 million. The growth the company has seen in the 21st century, bolstered by the popularity of microlending among the West, helped fuel its share price; between 2004 and 2010, the company’s outstanding loans grew in value from $2.7 million to $3.5 billion, as the BBC figures it.
In Andhra Pradesh, the rash of honor suicides has alarmed the government into action. The state has ordered that the “bankers on bicycles,” the payment collectors who visit their clients at their homes (a hallmark of microlending) be blocked from making their rounds, in effect cauterizing the revenue streams back to companies like SKS.
On the other side of the fence, the for-profit microlending institutions are asserting that they help, not harm the poor who they serve. Without profit and investment, the microlending model would be unprofitable, and destined to fail. Profit-fueled capitalism — not unsustainable socialism — is the format that will save microlending and allow it to fulfill its destiny as the mechanism by which the world’s poor will be lifted out of poverty, they reason.
It is true that the microlending model requires a lot of upfront investment to stay afloat and, although in theory it is the case, the standard model for microlending hasn’t proven to be capable of sustaining itself indefinitely. But it is also disingenous to suggest it never will. It’s a relatively young and radical means of lending. Even more to the point, which is the more desirable option, a long, meager life or an early death from ritual suicide?
As ever, SYSK takes the position that the decision to lend through microfinance sites like Kiva is up to the individual. Take the time to understand both the benefits as well as the flaws and potential pitfalls of the process.
For my part, the more I hear the concept bandied about that opening up microlending institutions to the markets for investment will only help get more loans to the poor, the less confident I am in the system. It seems that as more institutions look to move into the microlending sector to increase profits, the more non-profit lenders will have to go it alone.
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