Micro credit seemed to be the new fight against poverty. Everybody was getting involved. From the richest of the rich to the poorest of the poor, people all across the world were taking part, either as debtors, as creditors, or by donating to help a cause. But is it all really as helpful as it seems? Micro credit is still around, although the name has changed a few times. There are still a constant flow of debtors, willing to do whatever it takes to get themselves out of poverty. If you look at what it takes for these people to try to make a profit with the money they are loaned, you see that on a macro scale, micro credit loans alone are not all they are cracked up to be. But what will it take from micro financing organizations to make this a worthwhile system to reduce world poverty?
The idea is that becoming a micro credit debtor gives people a chance to make money that normally wouldn’t have the opportunity. In order to run a business, you need a product, and to make a product, you need raw materials. The credited money goes towards buying enough raw materials to make products to sell for profit. That profit would then be used to pay back the loan and to buy more raw materials. It all seems to make sense. But what about the little things a business needs to function? Water, electricity, maybe a whole new building depending on the size of the operation; these are all things a business owner needs to take into account when starting a business, and all these things may not be covered under the loan that a person receives.
In order to make a product, you also need labor. Hiring a whole work staff is probably not in your micro credit budget. Most likely, the work staff will include the person who received the loan and other members of the household. This means house chores, rest, and amusement all get put on hold until the job is finished. There is an increase in the pace the work is being done, yet no money is being spent on wages, so all that money is available to go right back to the creditor to pay back the loan. There are also no labor laws, no vacation time, and no 8-hour work days. This would be unheard of in a more developed area. The workers are giving up their lives to produce a product, pay back the loans, and, hopefully, start to make a better life for themselves.
After the product is made, it comes time to sell the product. The debtor then has to transport the goods to the market. They have to pay taxes, tolls, gas for the car, and all of that may not be covered under the loan. Once there, they are competing against products that have been mass produced by larger companies, and therefore are cheaper. They are up against companies who have the money for advertising, marketing, and fancy packaging to draw in customers. These are not readily available and cost more money, making it an unnecessary expense when loan payments are creeping up. Let’s not forget that these people may be living in a very impoverished area. Who’s to say that people in their town will even be able to afford the goods they are selling. They may have to travel to other towns, paying exorbitant fees to transport the goods and themselves and losing valuable time that could be spent making more products.
Like most loans, paying for the amount of the loan is not what is most expensive. It’s the interest payments that make the price so high. Taking out a $30 loan to be paid back over the course of 6 months to year sounds reasonable, until you factor in an average 30% interest rate to be paid back with each payment as well. That means, the person needs to be making enough money to cover the interest every week, and with all the other payments they have to make to help the business run. This can be difficult. Interest rates can range anywhere from 10% to 200% depending on the company and the size of the loan. In 2012, Compartamos, a Mexican bank and the largest micro financing bank in Latin America, charged an interest rate of 195% per year. CrediConfia was acquired by Accion, both are micro financing banks located in Mexico, and charged 229%. In Zimbabwe, micro financing groups were charging upwards of 500%, and finally the government had to step in. People start to get desperate. India had to change regulations on micro credit loans because 54 people ended their lives so they didn’t have to pay back their loans . While death is quite an extreme response to high interest payments, you do see people taking out loans to pay back their loans, and thus the vicious debt cycle begins.
Micro credit debtors have a lot more to worry about then traditional business owners or workers in developed countries. All the jobs that the debtor is in charge of are broken into different jobs in more developed countries. So many responsibilities are put on the debtor that he becomes the owner, the laborer, the provider of materials, the repairman, the seller, the marketer, the transporter, everything. And he does all of it without pay, without rest, and without rights as a worker. He does all of this work nonstop, with some help from family members and friends who are also not making a wage, in order to pay back the loans plus interest in an effort to better his economic situation. However, with all of the profit going to paying back the loans with interest, how is he supposed to have enough to spare for his family?
Giving money is great, unless the person doesn’t know how to spend it. Micro Financing Organizations need to do more than just give out money to people to start their own businesses. They need to educate people. Teach them how to keep account of the money they have. Teach them how to spend it wisely. Give them the expertise in the industry field they are trying to enter so that they can succeed . They can then have the confidence to be business people, to shop around for interest rates if the resources allow. They can be smarter about what processes they use in order to spend less money, and can potentially streamline their businesses, giving them a chance to rise above the poverty line. With education, they become more successful and can stay successful for longer.
Where the money is going is a bit troubling as well. Of course, most micro credit programs are focused in impoverished areas, seeing as they are meant to give people from poor economic means a way to better their financial situation. The European Commission found that most of the money from these loans, about 28% is going to agriculture and trade. Only 3% of the money goes to education, health, and social work . These statistics show that material goods are being placed over people’s well-being. If more loans were being placed in education, people would be more qualified and have more knowledge to find jobs that paid better. If more money went into the health care system, people would be healthier and able to work more. Having a healthier and more educated society could help the population on their way out of poverty.
In some cases, micro credit programs do work. Grameen Bank has made huge difference in Bangladesh over the past few years. In 2012, it was voted the #2 Top Nonprofit in International Microfinance by international microfinance experts . They set up a group loan model. People can only take out a loan if they are part of a group. If someone doesn’t make a payment on a loan, the whole group can become ineligible for a loan, giving the people more incentive to get their payments in on time. It also provides a support system. You work together with your group to pay back loans instead of having to worry about the whole thing yourself . It’s a great way to get people interested and more willing to take out loans, and instills a sense of community and camaraderie amongst the population.
The #1 Top Nonprofit in International Microfinance in 2012 was BRAC. Similar to Grameen Bank, BRAC does more than just hand out money to people living in poverty and slap on an interest rate to make the money back. They have shown consistent growth since it was founded in 1972. They have branches in 10 African and Asian countries and offer services outside of just banking. They set up schools, they provide health care and build up health care networks in the communities where they work, and they help in agriculture. They also keep excellent records and do lots of analysis to monitor the types of people and level of poverty they are reaching . They set an example for how a community can prosper when micro credit is more than just money lending.
BancoSol is another great example of an institution doing more for the communities they work in. Banco Sol has been working under the Accion umbrella in Bolivia since 1992 and has been growing ever since. They have two different institutions: one focused on microloans and one focused on savings . As of June 2014 they have 244,529 active borrowers and 656,455 savers. Most of their clients are women who work as market vendors, seamstresses, bakers, candy makers and more. Their loans start at $50 and their average loan for 2014 was about $4000 . They provide their clients with business training and financial literacy to be able to manage their finances and stay informed . BancoSol’s success in Bolivia shows the different facets of helping impoverished families work their way above the poverty line.
What all these institutions prove is that traditional micro credit or micro financing services are not as successful as people originally thought and helping impoverished communities involves more than just handing over money. Working with communities in other ways then just money lending, including health care and education are key to creating a lasting impact. They teach people how to use money, teach people how to take care of themselves, and give them the means in order to do both of those things. Trying to make a business out of getting people out of poverty by charging ridiculous interest rates that no one can afford, especially not poor families, is only a way for businesses to help themselves, not the communities they are working in.
The idea of micro credits seems like it would help. It’s providing money and resources to people who don’t have access to those things normally. However, there is more to the problem and people need more resources than just money. People can dig themselves into an even bigger, more impoverished hole if they don’t get all the facts. Some companies charge interest rates that are ridiculously high, so high that it is impossible for poor families to even think of making money, even just to pay back previous loans. Most of the profits debtors make go directly to the creditors that loaned it to them in the first place leaving them in the same position they started in, or possibly worse off. Micro credit has turned into a business for the already well-off and is taking advantage of a desperate developing population, willing to do anything to improve their financial situations. In order to make the system work, organizations need to give more than just money to these poor communities. Otherwise, those people will be stuck in a vicious cycle of debt that they will never be able to get out of.