by Philip Mader
Microfinance is not measurably reducing poverty, but has another less-acknowledged success: financialising poverty. For the industry this is gold – turning poverty into an investable asset, generating value for investors and intermediaries. What that means for the poor is another issue. According to my calculations, the borrowers pay at least 21.6 billion US Dollars annually in interest, before repaying the outstanding capital, let alone keeping a single penny for themselves and their families. These numbers reveal the brute financial materiality behind the pretty world of client stories and vision statements.
By the available evidence, microfinance hardly is sending poverty to museums, as prophesied by Muhammad Yunus. On the contrary, methodologically sound research finds it difficult to produce evidence that small loans help poor people grow their businesses or incomes, consume more, or empower women. And that is when compared to doing nothing at all, not alternative options. For lack of better evidence, mathematician and economist David Roodman has suggested the best guess of the average impact of microloans on poverty is “zero”.
The microfinance industry’s standard of evidence (and response to the persistent lack of evidence of poverty impact) is client stories. Many even simply say they “believe” in the power of microfinance to help the poor. That belief is not in question – it’s the entire point. The would-be investor or donor confronts a barrage of client stories ranging from the encouraging to the plainly miraculous. Among the more miraculous is Mary from Malawi, who climbed from homelessness to businesswoman and owner of ten houses, all thanks to a few microloans. Even without doubting their veracity, it takes just a few thousand such client stories (among 195 million clients) to fill donor publications and paint an unrepresentative picture. Collectively, they weave a narrative of poverty as a problem of finance – not social structures, unfair terms of trade, caste, or economic inequality – aimed to enchant even the youngest. If all the poor need is a bit of financial intermediation, the narrative insinuates, then everyone can have their chance, assuming they are willing to join the ranks of the “working poor”. As inherently finance-savvy agents – “Third-World portfolio managers”, as Darryl Collins and co-authors portray them – the poor are supposed to benefit intrinsically when people in the North make financial services available in the South. And we don’t need to change our ways; just lend them what we already have: excess capital.
Whatever the poor may truly want, their representation as eager subjects of finance ready and willing to invest, hedge and arbitrage their way out of destitution has informed the astonishing growth of microlending. Yes, micro-lending: because microfinance remains built on debt. For all the babble of “comprehensive financial inclusion” via savings and insurance, few MFIs have walked the walk. Microinsurance, much-extolled, remains in the industry’s infant intensive care ward (articles like “Why The World’s Poor Refuse Insurance” abound), while savings are plainly neglected. In 2012, of 1,263 MFIs globally, 579 reported no client deposits at all, while another 255 had under 1 million Dollars in deposits, compared to 978 who lent more than 1 million. While (compared to global loans of just over 100 billion Dollars) microsavings came to the superficially encouraging sum of US$ 86.5 billion, in fact 48.4 percent were at Harbin Bank (China) and BRI (Indonesia) – a large commercial bank and a state bank; hardly typical microfinance institutions.[i] The simple explanation for the imbalance is that most MFIs (probably correctly) see savings accounts as expensive and inefficient. This focus on profiting from loans is hardly at odds with the social narrative outlined above. Rather, it is hard-wired into that narrative, since the industry’s prized “financial sustainability” means nothing less than that clients must pay the full costs of everything; by most definitions even the costs of capital.
MFIs therefore use loans to extract a share of the labour power of the poor – Marx might call it “exploitation” – and accumulate it into the financial system. I use the Mixmarket global dataset to estimate the value of this labour. The MFIs reporting to Mixmarket lent a total of 100.7 billion Dollars in 2012, on which the weighted average portfolio yield was 21.5 percent. Taking this (very low) yield figure as a proxy of interest, a simple calculation reveals that the borrowers paid at least 21.6 billion Dollars, in excess of the loan amount.
This is a bare minimum (floor) estimate of what the microfinance industry appropriates from its borrowers. For a number of reasons – including portfolio growth, under-reporting, conservative assumptions, forced savings, penalty interest, additional loan fees, and the unrealistically low interest rate (compare the Economist recently on rates rising to 35%) – even this hefty figure constitutes a significant underestimate. How can we put these 21.6 billion into context? It’s more than the GDP of Zambia or Uganda (or Nicaragua and Mongolia combined). Annually, microfinance borrowers pay nearly as much as the debt relief granted to their governments in 2005, the year of the G8 summit at Gleneagles (the highest ever given in one year, 23.9 billion Dollars). Microborrowers are paying considerably more interest than the government of Greece paid for its national debt in 2010 (16.6 billion Dollars), just before Greece was taken into custody. Greece’s payments, it is said, were large enough to be “systemically relevant”.
We know what the poor pay. We don’t know what they gain. Given impact studies can’t demonstrate benefits outweighing costs, this should be alarming. Whether the poor intrinsically value “consumption smoothing” highly enough to justify their payments is beside the point: take-it-or-leave it, increasingly what they get is financial services (instead of education, healthcare or jobs). The price they pay is financing an expansion of the global financial system, at a systemically relevant scope. Microfinance as a new asset class empowers First-World investors to own asset streams generated by people at the very margins of Third-World society, and the butt end of the global market (known euphemistically as the “Bottom of the Pyramid”). In the words of Kiva co-founder Jessica Jackley, microfinance allows “the average individual to feel like a mini-Bill Gates by building a portfolio of investments in developing world businesses” – Northern individual, that is.
Whether greed or altruism is the driving force hardly matters. I personally favour the explanation that many philanthropically-minded individuals have been lured and blinkered by the compelling narrative of poverty as a problem of finance into eschewing alternatives for “doing good”. They contribute inadvertently to a new system of marketising and commodifying the last resources still outside the global market which the poor possess – their labour power – through “inclusion” into the capital markets. Financialising poverty.
There is now much talk of “responsible finance” and client protection. But what is this supposed to mean in an industry whose primary success has been to grow and extract more value from the poor? As Chuck Waterfield shrewdly pointed out here: “Not a single MFI has yet been judged as not meeting the criteria of ‘responsible microfinance.’ Do you think we’re on the right track?” Clients and MFIs have competing interests. The conflict has been built into the microfinance industry at least since the day “financial sustainability” became its operating principle; maybe longer. Recognising the conflict implies far more than implementing voluntary ethical codes or best practices. At the very least it requires regulation that can bite, with teeth like sophisticated interest rate caps, independent debtor rights counselling, and bankruptcy laws that assist the overindebted poor. MFIs and their interest groups are likely to fight such measures at every step. But most likely, recognising the conflict entails far more: reconsidering the assumption that financial systems generally work to reduce, rather than exacerbate, existing inequalities and injustices.
Philip Mader’s book “The Political Economy of Microfinance: Financialising Poverty” is forthcoming with Palgrave later this year. www.philmader.com.