It’s been 20 years since Muhammad Yunus won the World Food Prize for his work pioneering the concept of microfinance–the practice of providing financial services to low-income individuals who don’t normally have access to banking. Microfinancing institutions have undoubtedly been a boon to the world’s poor, providing small loans with the promise for recipients of one day achieving financial independence. But according to a new report from the Brooks World Poverty Institute, the microfinance world is struggling with some major moral issues.
The report, Has Microfinance Lost its Moral Compass?, posits that many microfinance institutions no longer care about their purported mission of empowerment and poverty reduction –and that activists who protest activities in the mainstream financial world should also turn their attention towards the injustices in the microfinance sector.
The report, which has a specific focus on microfinance in Bangladesh, explains:
Unfortunately, the compelling narrative of the success of microfinance–of millions of heroic and entrepreneurial women lifting themselves and their children out of poverty (and into relative affluence) through small loans and self-employment–is not supported by serious evaluations of microcredit. Systematic long-term studies indicate that the impact on incomes is limited…and at times may be negative. However, the exaggerated messages of “magic”, “miracles” and “success” in the Western media makes it difficult for the public of the rich world to understand the crucial distinction between delivering microcredit to the poor and tackling poverty.
Part of the problem is that loan officers at microfinance institutions (MFIs) have more of an interest in growing their portfolios than in poverty alleviation. The report cites instances in Bangladesh, for example, where loan officers have asked clients who can’t repay their loans to take dramatic measures to get the money: taking their kids out of school, asking them to stop taking medication, confiscating basic cooking equipment, and so on.
This desire to grow portfolios also spurs credit officers to convince poor women to take small loans that nevertheless grow into big debts, largely because of their inability to make weekly repayments known as “kisti”:
Two particular problems make paying kisti difficult for many women. First, a high proportion of rural households in Bangladesh do not have a regular income: income varies with time of year, demand for casual labour, the weather and a set of factors outside of household control. Second, households have high levels of exposure to shocks and hazards which affect their repayment capacity.
MFI’s often have high repayment rates, but this isn’t just because borrowers have been successful in their endeavors–it’s also a product of loan officers verbally abusing, threatening, sexually harassing, and humiliating borrowers into repayment. These are, according to the report, common strategies.
The majority of loan officers interviewed in Bangladesh by Mathilde Maitrot, who contributed to the report, say that they are afraid of punishment from their bank managers if they fail to collect kisti. One credit officer is quoted in the report:
“When I do not get an installment […] and explain that there is a problem in this house and they cannot repay today […] my boss orders me to sit in that house until the clients gives the money: ‘If you have to sit there throughout the night you will but do not come back without the installment’ he says. So if I leave without the kisti I face this kind of mental harassment and physical exhaustion… I feel like quitting the job.”
Instead of shutting down the formal microfinance industry, the report recommends more effective regulation, and more importantly, asking the leaders of big MFIs to reform employee monitoring systems. Kiva, a popular microfinance platform, did not respond to a request for comment on this article. (Update: Kiva’s response is in the comments section below).
The full report is available here.