Microcredit is beginning to make some enemies

Microcredit is beginning to make some enemies along the way. Some studies have shown that it does not lift people out of poverty and could only drive people further into it with over-indebtedness. Politicians have stirred up controversy over alleged impropriety in Bangladesh, and the serious problem of over-indebtedness in India. We have come a long way from the hopeful days of thinking that microcredit would be a major player in fighting poverty, now many are not so sure.

From this New York Times article that we found at the Honolulu Star Advertiser, writer Vikad Baja describes the predicament that microcredit finds itself in.

The hostility toward microfinance is a sharp reversal from the praise and good will that politicians, social workers and bankers showered on the sector in the last decade. Philanthropists and investors poured billions of dollars into nonprofit and profit-making microlenders, who were considered vital players in achieving the United Nations’ ambitious Millennium Development Goals for 2015 that world leaders set in 2000. One of the goals was to reduce by half the number of people in extreme poverty.

The attention lavished on microcredit helped the sector reach more than 91 million customers, most of them women, with loans totaling more than $70 billion by the end of 2009. India and Bangladesh together account for half of all borrowers.

But as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success.

Done right, these loans have shown promise in allowing some borrowers to build sustainable livelihoods. But it has also become clear that the rapid growth of microcredit — in India some lending firms were growing at 60 percent to 100 percent a year — has made the loans much less effective.

Most borrowers do not appear to be climbing out of poverty, and a sizable minority is getting trapped in a spiral of debt, according to studies and analysts.

“Credit is both the source of possibilities and it’s a bond,” said David Roodman, a senior fellow at the Center for Global Development, a research organization in Washington. “Credit is often operating at this knife’s edge, and that gets forgotten.”

Even as the results for borrowers have been mixed, some lenders have minted profits that might make Wall Street bankers envious. For instance, investors in India’s largest microcredit firm, SKS Microfinance, sold shares last year for as much as 95 times what they paid for them a few years earlier.

Meanwhile, politicians in developing nations, some of whom had long resented microlenders as competitors for the hearts and minds of the poor, have taken to depicting lenders as profiteering at the expense of borrowers.

Nicaragua’s president, Daniel Ortega, for example, supported “movimiento no pago,” or the no-pay movement, which was started in 2008 by farmers after some borrowers could not pay their debts. Partly as a result of that campaign, a judge recently ordered the liquidation of one of the country’s leading microlenders, Banco del Exito, or Success Bank.

“These crises happen when the microfinance sector gets saturated, when it grows too fast, and the mechanisms for controlling overindebtedness is not very well developed,” said Elisabeth Rhyne, a senior official at Accion International, a organization in Boston that invests in microlenders. “On the political side, politicians or political actors take advantage of an opportunity. When they see grievances, they go, ‘Wow, we can make some hay with this.”’