Several enthusiasts interested in working in the relief and development industry have come to talk to me about microfinance in the last couple of years. Some wanted to help the poor by giving them a chance to do business, utilize capital, and get out of poverty. Others were simply curious because of its rising popularity, especially in light of the famous Grameen Bank in Bangladesh. I was not surprise by the fact that they had some ideas about microfinance already, but what surprised me was that the questions they asked me were the same over and over. Soon I discovered that they were simply influenced by myths of poverty stories amplified by media in the Global North, and sadly but truthfully, truncated stories by the industry itself. In light of this please allow me to unveil some of the myths you should know about microfinance.
First Myth: Microfinance is giving micro-loans to poor people.
Most people think microfinance is synonym of microcredit. No. There are two fundamentally different microfinance schemes – one is lending (credit) based and the other is savings based. While lending scheme begins with a microloan given from outside, savings scheme begins with what one has. This leads to the next myth.
Second Myth: The poor have no money and that’s why they need loans.
Most poor people have money and manage their money all their lives by themselves. It’s not much for each individual, but that also depends on how you look at it. If each poor person of “the bottom billion” lives on $2 a day, then it is over $700 billion capital a year worldwide! What they do not have is an access to safe places to keep their money. Safe Save (www.safesave.org) and other similar Microfinance institutions (MFIs) have innovated for several decades to provide safe depository products in slums and villages where there are no banks. But they have not been under the spotlight like Grameen Bank has been in the Global North. Why? The Golden rule: One who has gold rules.
Third myth: The poor can get out of poverty cycle quickly if they receive a micro-credit and do business.
This is how the micro-credit you have heard about works: An MFI goes to a village and distributes small loans ($50 to $100 per person) to poor illiterate women. These women would then start small businesses by themselves and make more than what they borrowed. They would feed their children, send them to school with their profits and pay back the loan. But, people with little life-skills often lack in simple business skills. They were used to manage $2 (or a little more) a day and suddenly receive fifty times higher amount than what they were used until yesterday for most of their lives, and suddenly they are expected to plan their lives in a yearly cycle of repayment. Most struggle with these changes and many fail. But why have these lending-based MFIs have been known to be successful? Because they have the power to chase their money and pressurize their borrowers. I used to hear in local newspapers in Bangladesh about village women committing suicide because of the pressure of over indebtedness and the shame in the village. These stories, which I had hard time believing my own eyes and ears, are now being criticized internationally (For example, ‘Debt trap leads to despair for rural poor’ in Financial Times, October 29, 2010). Micro-loans have swallowed up the poor into dept traps instead of freeing them from poverty. “The poor always pay back,” is the slogan created by Grameen Bank’s founder, Dr. Mohammad Yunus, the Nobel Peace (not Economics!) Peace Prize laureate. The poor, micro-borrowers do not have power to not pay back like some rich big borrowers do.
Fourth myth: Then savings must be the solution for eradicating poverty.
Savings-based products are slower to work with because your focus as an MFI is to empower and help people develop skills to save first and then do business. And it is much harder work because the money you are trying to help saving isn’t yours, but their own. Without trust being built first, they are not going to do what you, ‘know-it-all’ outsider, suggest. Human capacity, the skills to read and write, add and subtract isn’t simply the answer. The answer comes from a much deeper source.
Have you ever saved money? Remember a childhood piggy bank? How hard was it for you to give up your desire for that little candy? Having one candy could make you happy now. Having two might make you happier. How many candies would guarantee your unceasing happiness? Some gurus in the Wall Street suggest that the answer is always more.
Who taught that desire in you that saving is better than candies? Or one candy is enough for today and you will have another one tomorrow? Or save all the money you can everyday so you may buy an iPod next year instead of having little candies everyday and end up screaming in the dentist’s office in a few months? Or donate to charity to make unhappy people happy? Who taught you what is a good life for you and for me any way?
What we learn and do is not always what is taught in school or even spoken at church. It comes from the culture in which we breathe and behaviors that we copy from others. Debt, which was understood as shame and inability to manage money a generation ago, has become the norm of our financial behavior today. No one asks why. Defining poverty and capacity always comes from sources other than money and human capacity.
Do borrowers always pay back? Some do. Others don’t. You know the answer when you look inside your own wallet, don’t you?