The Myth of Micro Finance

Nirmalya Biswas, writing in Mainstream, explains the ‘micro finance’ model has been touted in recent years as a means of poverty ‘alleviation’ is in fact another means to exploit the poor. Neo- liberalism, the contemporary face of capitalism, tries to solve the problems it creates by the same factors that cause its crisis. On the one hand, there is a surplus of capital, on the other hand there is a surplus of the poor. Micro financing apparently tries to solve the problems of the poor but in reality is just another means of multiplying the return on capital.

Similar too is the recent interest expressed by the Tatas and others to create housing for the poor in Mumbai.

Micro Credit appears to be pro-poor in form but in content it is actually anti-poor to the core. The adverse clauses of the loan agreement are carefully kept hidden in a ‘sugar-coated’ loan package. The ‘ever-trusted’ media censors certain pertinent information in fear of full disclosure of the evils of Micro Credit. The penniless poor listens to no reason but gracefully accepts the loan offer to avail the ‘cash inflow’ and solve the present crisis temporarily. The taste of its bitterness becomes palpable only when the installments fall due.

Micro-credit borrowers come from different walks of life. They are street hawkers, artisans, rickshaw or cart-pullers, weavers, blacksmiths, fishermen or women tailors, cobblers, milk-men or maid and others. Working from dawn to dusk they produce and earn as much as possible in order to meet the loan obligation. The repayment schedule casts a shadow upon the household activities of the borrowers. The spouse, the old parents and even the children of the borrower join hands to extend support to the borrower to speed up production. The siblings do all the domestic chores. They stop going to school. They forget their childhood. The pressure of duty forces them to grow older than their age. The borrowers do not engage paid labourers from outside the family. The surplus thus created by utilising their own labour power is appropriated by the micro-credit operator in the name of interest included in the instalment dues. The big firms appoint managers to keep a watch on the work of the labourers and introduce incentive plans to raise their efficiency level but no such measures are to be adopted by the micro-credit-supported ventures. Here the labour power of the borrowers and dependents of their families are voluntarily engaged without any hired surveillance. Provisions of the Factory Act relating to safety and the health of the workers, restrictions of employment of women and children, payment of minimum wages, bonus, overtime wage, holidays are alien to them. The surplus created by exploiting the labour power of the borrowers and their family dependents by the worst primitive means is apportioned by the micro-credit operators in the name of interest included in the instalment.

This is what Jerry Rao, exponent of financing ‘nano’ houses in Mumbai has to state about the super high returns from financing loans to the poor:

But, if we get it right and build and sell the project in 12-18 months, then the return on equity will be in the 30-40% range. It is actually quite an attractive place to be in.

Author: bhupinder singh

an occasional blogger

7 thoughts on “The Myth of Micro Finance”

  1. I am not too sure, if we can completely call it anti poor. Of course, like every concept, the manner in which it is being done makes a lot of difference. But it is important to also understand that microfinance as a concept was born to protect the poor from the money lenders who were taking higher interest rates from them and even bonded the poor to labour for ever. There are microfinance models, where the group distributes the loan among themselves and also does the monitoring of the repayment. Whether loans are a good means by themselves, is a question, one can go deeper into. But when the model also enables the group to make the best use of the money obtained, in income generating activities, it could be beneficial too.

    1. Your comment is quite fair. The writer, however, has a very specific model in mind that is indicated at the start of the article:

      The World Bank, United States Agency for International Development (USAID), United Nations Development Programme (UNDP) and Citi Bank became the chief patrons who declared allocation of special fund for Micro Credit. Over the years the major commercial banks and the multinational corporations like Monsanto, Citi Group and others decided to sponsor Micro Credit.

  2. jerry rao seems to have learnt nothing from the subprime triggered financial crisis in the usa and wants to replicate it in india. micro-credit has been there in this country for ages in the form of informal rotating savings and credit associations. the difference is that now these small credit groups have access to institutional finance either through bank linkage or through micro-finance companies. in the case of bank linkage as promoted by NABARD there is very little to complain and these have provided a very good way of including the unbankable into the financial system. there are umpteen success stories and to its credit NABARD has provided both training and subsidised finance to make this a success. one factor that is indispensable in such cases is that of the mediation of a good NGO. without this such micro-credit groups tend to wither away after some time. but even these small success stories come up against the problem of lack of sustainability because of the crisis of agriculture and natural resource degradation in rural areas and the low returns to labour in urban areas. unless the capitalist system of appropriation of surplus value and especially the depredations of high finance are banished micro-credit will not solve anything in the long run
    however the micro-finance companies are a different story altogether. they are basically moneylenders charging a slightly lesser interest because they have access to cheaper funds than the former. with people like jerry rao at the helm such companies are engaged in fleecing the poor instead of doing anything for their betterment.

  3. Even if it’s well intentioned at times, it can’t solve the long term capitalist crisis. Parts of India still even have a caste system. A program like micro financing is a drop in the bucket.

    See the Carnival of Socialism post at my blog.

  4. is microfinance really helps to kill poverty??

    just ask for an opinion of yours..


    opinions are really appreciated…

    just wait for the reply..

  5. Anything claiming to help the poor, but works for profit, is a SHAM. These companies get cheap funds, why should they use this for profit? They must just cut out the operating expenses (honest expenses) and pass the rest on the poor. When you focus on profits, you don focus on helping the poor! As simple as that!

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