Raising Hell: QandA: What The Hell Is Microfinance?
“Money, says the proverb, makes money. When you have a little, it is often easier to get more. The great difficulty is to get that little." - Adam Smith, Wealth of Nations, 1776
It was about fifteen years ago that wonkish technocrats and well-meaning NGO heads began to embrace the idea of microfinance. By that point, the idea of lifting millions of the world’s poorest citizens out of poverty through a form of financial wizardry had been around for 40 years but the idea of using debt to fight global poverty really began to take off in the early 2000’s with an intensity that sometimes bordered on the messianic. Microfinance was talked about at conferences the inventor of microfinance did his own TED Talk, while those organisations that actually leant small sums to groups of people so they could buy things like sewing machines or crop seeds began producing starry-eyed videos explaining how it was supposed to work.
As someone who has much to say on the subject of debt and indebtedness, I have long suspected microfinance of being no different to payday lending — an industry that is at least honest enough not to bother dressing up what it is doing with talk about a “social purpose”. My instinct on this was confirmed recently when I ran across an editorial co-written by Dr Melissa Johnston from the University of Melbourne, whose research deals with the intersecting forces of conflict, gender, violence and finance. Their conclusion was that microfinance was another clever solution that actually worked to make everything worse, but is now being finding itself increasingly deployed here in Australia — so naturally I got in touch to learn more.
This interview has been edited for style and length.
Royce Kurmelovs: I remember a while back, there was this story being told that microfinance can save the world. Can you tell us a little of the background about the idea?
Dr Melissa Johnston: The founding myth of microfinance starts with Muhammad Yunus, a smart guy who founded the Grameen Bank and won a Nobel Prize in 2005. The story begins like this: One day near his home in Bangladesh, he sees a poor woman making roti or clothes, and struggling with economies of scale, or lack of technological inputs. According to the myth, Yunus realises that with a small loan, the woman can buy a sewing machine, or more raw products, increase her output and make more profit.
However, as my research and other historical studies of political economy show, microfinance — the idea of lending small sums without collateral to specific groups of people — actually started during the expansion of plantations in colonial regimes, not in the 1970s. In Indonesia around the year 1900, there were widespread famine-induced riots so the Dutch began lending to farmers to control more of the agricultural sector.
In any case, in the 1970s, the idea of small loans as a “hand up, not a hand out” for women became very popular. The “hand up” is seen as coming from the market, and a “hand out” from the government. It formed part of a suite of changes brought with neoliberalism that extended from aid grants to lending.
One of the key players in this expansion was a for-profit arm of the World Bank, the International Finance Corporation. They provided bulk loans to microfinance organisations, rewrote laws on finance in many countries — basically deregulating them so a bank could charge as much interest as they like, and ensured the laws allowed microfinance banks to use land parcels, motorbikes and so on as collateral. At the same time, microfinance was also taken up by key women’s rights organisations as they gained more prominence and resources. The feminist angle was first that these loans were income that gave women more power in household bargaining and second, that home-based industry allowed women who were completely excluded from the public sphere to do work outside the home.
Of course, this is all now beside the point. Randomised controlled trials have since proved microfinance does not work. Basically, these are tests where some people are given microfinance loans and others are not. The results showed microfinance made no difference to poverty. The results were so compelling even the World Bank has admitted that now.
RK: People tend to associate microfinance with developmental programs in distant countries, but this is also something being suggested for use by Australians. Can you tell us about that?
MJ: The act of bringing microfinance to Australia is one fairly rare instance of policy transfer from Global South to Global North. Microfinance in Australia also has its own origin myth, where key figures in Australian microfinance went to places like Cambodia, and, were so affected looking at all the poverty and conflict, they decided to help the women there by lending them money for their businesses. On returning to Australia, these key figures sought to bring microfinance to vulnerable groups like single mums and Indigenous Australians.
“The act of bringing microfinance to Australia is one fairly rare instance of policy transfer from Global South to Global North.”
The structural context is also important, so this development needs to be read against the backdrop of government reforms to reduce social security access, stagnating social security payments and wages, and increased household debt. This has seen market-led policy solutions for dealing with the poor and economically marginalised that are widespread in the Global South come to Australia. We have all seen how social security in Australia has been cut to bare bones, and more and more controls rolled out to police those who rely upon them. Microfinance is convenient in this context. Because it is not a “hand out” from government, but is provided by heavily government subsidised charities who on-lend money, it outsources poverty reduction.
RK: Can you give us the mechanics of how it's supposed to work?
MJ: Microfinance generally describes small loans to the subprime market. The term “microfinance” actually replaced “microcredit” after critics began pointing out how it could facilitate domestic violence and there was an incident involving hundreds of suicides in Andhra Pradesh, India. Many farmers took their own lives when microfinance loans fell due during a period of drought. Because these loans came with a life insurance policy, they saw it as a way to pay out their families.
Lately the terminology is evolving so now we hear microfinance being called “financial inclusion” and may extend to include insurance or to other financial products. Whatever it is called, the main business of financial inclusion is still loans.
The typical form of microfinance is the “group method”. This is where loans are made to women organised into groups who are collectively responsible to cover the debts with interest. Typically, a Microfinance Institution or NGO representative goes into an area to run a training session and then builds a group of around ten people. At this point, peer-pressure from the group ensures repayment, as the group must cover every individual’s default, and the groups will only get another loan in the next cycle if they repay the first. The choice these women face is “lose money or lose friends”.
And women are usually preferred as loan group members, not only because they are considered “better targets” for poverty reduction as they apparently spend money on family welfare instead of themselves, but they also have better repayment rates. Targeting women is motivated by profit, not just empowerment.
RK: What have you found with your research?
MJ: First, my research in Timor-Leste found that microfinance was not a new thing that came with the UN after independence, but rather had been used by the Indonesian military to aid the occupation and exploitation of coffee production. The other thing I found was that microfinance in Timor since 2000 has relied on class hierarchy and gender hierarchy to extract profits. Interest rates vary between 25 and 365 per cent and actually work to foment gender-based violence in ways that are pretty complex to explain. The over-simplified version is that the class system and the brideprice system are linked together. Women can’t divorce because the kinship links would collapse. If a husband beats his wife, he owes money to his father-in-law. Under conditions of poverty, that means it is in the parent’s interest to keep getting these compensation payments when their daughter is hit.
In Australia, Dr Kelly Gerard and I found that under the banner of “financial inclusion”, formal financial providers — notably the National Bank of Australia (NAB) and Westpac — have partnered with microfinance institutions in seeking to increase their market share among the poor. Good Shepherd Microfinance (GSM) are a microfinance institution run by the Christian charity organisation of the same name. GSM, for instance, use market segmentation to target their products at more and less vulnerable sections of the subprime lending market.
RK: What is the difference between microfinance and payday lending?
MJ: Microfinance and financial inclusion take place in a landscape of formal and informal finance. With the advent of digital lending, or peer-to-peer lending through Facebook groups, for example, the field of lending small amounts for high interest is a expanding much faster than the pace of research or regulation.
In the Australian case there is little difference in products like Speckle and payday lending. A loophole in the regulations also means that big banks in Australia are exempt from interest rate caps. Speckle is a personal loan offered by Good Shepherd Microfinance and NAB. It is aimed at the working poor, as a borrower must have an income and not be dependent on social security in order to access it. The loan can be up to $2,000, with the effective interest rate over a year of repayments for a $2,000 loan being 57.8 per cent. If a customer does not repay, the default rate is $1 per day. Over 12 months this equates to 16.5 per cent interest on top of 57.8 per cent, with the total possible rate paid being 74.3 per cent. With a $200 loan paid over one year, the interest rate remains at 57.8 per cent, and if the client defaults on the loan— at the cost of $1 for every day it is overdue — they could be liable for 335 days of default fees. This means that with Speckle, a $200 principle can produce an interest rate of over 200 per cent.
“In the Australian case there is little difference in products like Speckle and payday lending.”
In cases like Timor where there is little regulation and a highly developed informal finance system, the difference between payday lending and microfinance is about who has access to what kind of product under what terms. While the middle classes in Dili run microfinance NGOs or government schemes, village elites can access lower interest rate loans at 25-to-35 per cent and then they can then lend these on to poorer villagers. As a result, ordinary folks can’t really tell the difference between so called “good” microfinance and “bad” moneylenders. The difference between them is blurred in practice, and violence — or the threat of violence — may be used to enforce repayment in either case.
RK: When we spoke briefly about this, you compared microfinance to the Cashless Debt Card. Can you unpack that a little?
MJ: Yes, it’s strange how policy ideas are so sticky. I was referring to the most famous of the microfinance products in Australia — the so called No Interest Loan (NILS). Good Shepherd Microfinance do not pay the loan out in cash, but in effect give the client a voucher to buy an item, often a white goods product. The justification for paying retailers directly for products is that it prevents poor clients from spending money ‘inappropriately’, like the Cashless Debit Card and its earlier prototype, the Basics Card. NAB administers the loan, while the The Good Guys retail outlet supply the product.
RK: Why do you think the idea of microfinance is attractive to policy makers?
MJ: Looking at the historical trajectory of microfinance is useful to answer this question. In Nepal, Bolivia and Bangladesh, for example, the International Monetary Fund used microfinance as one of issues to deal with anger, resentment and poverty and lack of employment created by the International Monetary Fund’s structural adjustment programmes. That is, as social services like health, infrastructure, welfare and education were privatised or services cut, microfinance was used to fill the gap. This pattern of political crises, national loans, economic reform and then austerity with microfinance to cope, has been repeated in the shock therapy we’ve seen in Eastern Europe, and in post-war settings such as Bosnia, Cambodia and Timor-Leste.
So when we look at the Australian case, we see the same kind of roll back of state support, and roll out of loans sourced on credit markets to fill the gap. The result pretty much ends up the same. You see families unable to cope with a reduction in social provisioning — and then microfinance used to fill the gap by providing some new cash into the family. That this “cash” creates cycles of over-indebtedness among the subprime market seems to be ignored by policymakers.
To actually fix this, there is a need for serious public investment in child care, health, education, and social care. Governments prefer to spend money on things like roads and construction on the basis it is “investment”, while spending on things like health and education is considered “spending” and seen as a cost. As we learned during the pandemic, that is pretty much a sleight of hand. Modelling by feminist economists shows the returns over short, medium and long term in social care, social housing and education are significant. In short, to fix it, we need to stop filling the significant gaps in our economy with debt, and let government actually invest in our futures.
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