Microfinance: The Impact Upon Children

By Hugh Sinclair (author of “Confessions of a Microfinance Heretic”)

You’re a 30 year-old African woman struggling to make ends meet with four kids. A microfinance institution (MFI) assures you that a loan for $200 will get you out of poverty. You sell fruit, but so does everyone else. Margins are low in this competitive market. Volume is the only way to generate extra income, but it’s labour-intensive work. The fruit need to be kept clean despite the dusty street. The shop constantly needs to be tended, lest you miss one of your paying customers to your competitor next-door. You need an employee, but have little means to pay a salary on top of the interest you’re forking out for the loan. What do you do?

The ILO recently announced that Bolivia and Peru were leading Latin America in child-labour. Child-labour occurs principally in the informal sector, typically in the kinds of enterprises that benefit from abundant microcredit. Both countries are awash with MFIs, in what may be a sinister but symbiotic relationship. Walk around a crowded market in La Paz or Lima and kids are running around stacking shelves or carrying produce. Why aren’t they at school? And why are there so many uniformed MFI loan officers also running around?

Microfinance has faced substantial criticism recently. Academics seem to agree that it doesn’t really work. Chang, Roodman, Bateman, Duvendack, Stewart etc. all struggle to find firm evidence of poverty alleviation. Yunus got fired from Grameen Bank for largely political reasons, a string of suicides in Andhra Pradesh did little to perk up the reputation of the ailing sector, extortionate interest rates and mega-profitable IPOs left a sour taste in many mouths, but perhaps the worst nail in the coffin is not yet known: the impact upon children.

Evidence, so far, is mixed. Boosting household wealth obviously has a direct positive impact on children; educational loans likewise. Some studies credibly demonstrate that women with loans are more likely to send their kids to school. Certainly some microfinance is positive for children. But some may be negative, and no one is discussing this. This is a microcosm of the broader microfinance debate: some MFIs are doing great work and genuinely lifting the poor out of poverty. Many are not.

I investigated the microfinance funds to see if they have policies about preventing child-labour in the micro-businesses they ultimately finance. Vision Fund International, part of the child-focussed NGO World Vision, has an explicit policy; Oikocredit possibly establishes best practice in the sector. MyC4 and Zidisha, two peer-to-peer lending platforms, have policies. Opportunity International and Hope International have recently adopted policies. Perhaps surprisingly Deutsche Bank, responsAbility and ProCredit have policies preventing child labour. Beyond these players, most ignore the point entirely, barely capturing the name and address of most of their clients, let alone the school attendance of their kids. And yet almost every developing country on Earth has laws clearly defining child labour, having signed the UN Convention on the Rights of the Child. All MFIs need do is monitor adherence to the law. How funds enforce these policies is another question, but at least some have such a policy – that’s a start.

I approached the “Smart Campaign”, a US-based institution set up to apparently protect the interests of microfinance clients by asking MFIs to commit to “responsible microfinance”. Smart is funded by industry-insiders. They have 7 policies, none of which extend to children. Acknowledging that child-labour was in fact rampant, they simply responded that protecting kids was beyond the scope of their work. Smart presents itself as the fair trade mark of the microfinance sector, and yet ignores child labour which features prominently in all other fair trade initiatives.

What do the academics say? Here’s a quick summary, taken from the abstracts of three papers (my emphasis):

“[C]redit obtained for investment purposes may reduce the likelihood of schooling for children who currently work in their family business” Nidhiya Menon , Brandeis University, data: Pakistan

“[E]xpanded access to credit raises entry into entrepreneurship for households in specific wealth groups while simultaneously increasing the use of child labor in these households”. Leah Nelson, University of California, data: Thailand

“The results show that household participation in a microcredit program may increase child labour and reduce school enrolment. The adverse effects are more pronounced for girls than boys”. Islam, Asadul and Choe, Chongwoo, data: Bangladesh.

This is hardly a PhD-level literature review, but common sense suggests that child labour is at least possible in some micro-enterprises. If kids can contribute to the household income and learn skills, while still attending school, this may be tolerable. Perhaps there are no schools available, in which case the kid may as well work… perhaps. But most developing countries, particularly in Asia and Latin America, offer some degree of free public education.

The sector now boasts approximately 200 million clients. If only 1% of these are taking one child out of school in order to work in some micro sweat-shop, that’s 2 million children. No one is discussing this? Why aren’t governments obliging the MFIs to take a firm stance on child labour? Why are local regulators not enforcing existing child-labour laws? Why don’t microfinance funds in Washington, Amsterdam and Geneva make such simple legal compliance a condition for obtaining funding? How hard can it be: “you can only lend to clients in legal compliance of child labour laws and make reasonable efforts to enforce this”?

Child labour is illegal in most countries. The exact definitions vary. If MFIs were found to be lending to drug-dealers or pimps there would be uproar, but financing the criminal activity of child labour is acceptable, apparently. We know it is happening, we just don’t know the precise percentage. Meanwhile good, ethical, effective MFIs who do obey such laws, do not exploit the poor, offer well-designed loan products at reasonable rates, are tarnished with the same brush.

The sector is reeling from the backlash against over-priced, ineffective credit to the poor. It simply cannot have the emotive topic of child-labour put on the table. The sector cannot handle another nail in the coffin. Whipping kids out of school to stack shelves is a big nail. This is a topic that will remain moot, like the extortionate interest rate issue and the suicides, until eventually it will explode, academics will begin to cover it more rigorously, the media will pick up on it, and we’ll see another scandal. The danger is that we might not feel the effects of hordes of uneducated kids trained to stack shelves rather than read and write for a generation. By which point it’ll be too late.

Naturally the sector is hesitant to enforce legality of the underlying micro-enterprises regarding child labour. What next – health and safety standards? That the micro-enterprises have to be legally registered, or pay tax, or treat their staff fairly? The microfinance sector depends on illegality. If children’s education suffers in the meantime, is this merely collateral damage, as Madeleine Albright so eloquently put it?

This is entirely avoidable were we to (1) act responsibly, (2) put the welfare of the poor before profit, and (3) use some common sense. But all three are largely absent from recent microfinance history, and there’s no evidence to suppose this will change anytime soon. Only the donors and investors can force MFIs to act responsibly. Even our own self-regulator doesn’t seem too concerned about the welfare of children.

Microfinance can, and does, work. It is not for all poor people, but a sub-set, that are positioned to benefit from it. Some MFIs are aware of this, and have a clear mission to serve these clients fairly and effectively. They consider issues of over-indebtedness, the impact on the family, the viability of the underlying business. They are not solely motivated by profit, but seek to use credit as a tool to instigate change. Their fundamental interest is in the welfare of their clients, not the profitability of the institution. Such entities exist. But they are lost in the plethora of institutions that crowd the sector. As the backlash ensues – a backlash which may increasingly include illegal child labour – the principal danger facing the sector is that we will throw out the baby with the bathwater. We need to protect the baby carefully.

I applaud the work of those MF-operators who are taking a stand on such issues. I lament the fact that they are few and far between. Perhaps enlightened investors will direct funds more precisely to promote good microfinance and avoid the bad. If not for the sake of the current generation, at least for the next, let’s use the microfinance tool constructively and wisely to generate the outcomes which the ethical players truly desire, and not allow the vultures to spoil the party for everyone, rich and poor alike, adult and child. We can do better. Support those that are on this path.

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