Microcredit: Borrowing freely
What’s gone wrong with microcredit? asked Brian Keeley on this blog last month, in response to the growing furore in India and Bangladesh surrounding the activities of micro finance institution. Muhammad Yunus and the Grameen Bank are under attack from politicians in Bangladesh. In turn, Professor Yunus has become more vocal in his criticism of commercial micro finance institutions, although the commercial firms continue to enjoy the support of a number of articulate and influential commentators.
It was always likely – and desirable – that microfinance would lose some of its lustre. It never was the easy solution to global poverty that some of it cheerleaders claimed. Nor has the discussion around the impact of microfinance been helped by the simplistic characterisation of charitable microfinance as “good” and commercial microfinance as “bad”. Good practice is good and bad practice is bad, irrespective of the financial structure of the company.
Less attention has been paid to what might be called the political economy of microfinance. What impact have micro finance institutions had on economic relationships in the communities in which they operate, with particular reference to the distribution of power? Might the current crop of anti-microfinance stories have more to do with fear of changes to the power structure than with the level of interest rate charges?
Back in 1942, the American sociologist C Wright Mills wrote* that, “Not violence, but credit may be a rather ultimate seat of control within modern societies”. Given the central role of credit in a modern economy, whether this be a Western urban economy or an Asian rural economy, it is not surprising that the control of credit matters both to borrowers and to lenders.
Where credit is freely available, borrowing can be a purely commercial transaction. In this case the cost of credit (the interest rate) and the service provided by the lender (the way the borrower is treated) are the two most important consideration. Borrowers choose from whom to borrow based on the quality of service provided and the cost paid for the service. If they don’t like the price or the service they can go elsewhere.
Where credit is not freely available, borrowing is often connected to a wider range of activities that are determined by the traditional social structures. Wealthy families control the flow of money to their clients who, in return, are expected to do more than pay back capital with interest. Client communities, which might include extended families or, in some cases, whole villages, are expected to work for their patrons and to vote for them at election time.
Recent fiction by Daniyal Mueenuddin and Aravind Adiga capture the complexities of the power structures of these client communities and document the corrosive impact that they have on the lives of the poor. In such communities the very idea of providing credit on a purely commercial basis is a direct challenge to the political status quo.
In many parts of the world quasi-feudal relationships between rich landlords and poor clients remain in place. These social structures are also paternalistic, with women forced mostly into subordinate roles in education, in work and in politics. It is in communities such as these that microfinance has had a revolutionary impact: credit is now available on purely commercial terms, without regard to traditional social obligations and gender roles. Micro finance institutions are offering the poor a chance to borrow freely: they pay interest on their loans but that is the only price that they pay.
Who has most to lose from the growth of microfinance? The illegal loan-sharks for sure; poorly run state banks too; and, of course, those who benefit from political systems built on patronage, corruption, the buying of votes and the preservation of a culture of dependency.
Today, micro finance institutions are under attack from members of the political elite in India and Bangladesh. The only surprise is that it has taken so long for these reactionaries to start fighting back.
* C Wright Mills, Power, Politics and People, p. 46, Oxford University Press, 1963.