Global Crisis/Innovation Blog

Micro-Finance: the “Atomic Energy” Syndrome Returns

By Shlomo Maital

        A BBC report notes that India’s huge microfinance industry faces collapse, as the borrowers in an entire large state, Andrha Pradesh, struggle to repay their loans. In Bangla Desh, where micdrofinance was first invented by Mohammed Yunus,  the government has slapped a ceiling on interest rates for microloans: 27 %.   Ceilings (maximum rates) tend to become also minimum rates. And how many strong businesses, like Microsoft, could afford to pay 27 per cent on their debt?  

  What went wrong?

    It is the atomic energy syndrome.  Splitting the atom made possible an enormous source of energy for peacetime purposes.  Heat from nuclear fission (and one day, from nuclear fusion) makes steam, that turns turbines, that generates electricity.  But splitting the atom also makes it possible to create nuclear weapons,  thousands of them, that threaten humanity.  Like almost all technologies, splitting the atom is both a fantastic boon and an enormous evil.  It all depends on how we use it.

  Microfinance has been, expectedly, misused. By allowing the private sector to run amok in this area, with the aim of making profit, it has made microfinance into a micro-example of what the village lenders did earlier – charge usorious exorbitant interest rates that the poor cannot repay, then take away all their possessions when they fail to pay it – at times, leading to suicide. 

     Some industries are simply not suited to for-profit rapacious capitalism. Health care is one.  Microfinance is another.  Why do free-market advocates repeatedly grab control of industries that need to be provided as public goods, and turn them into private bads? 

     Dr. Kazi Akhmed, a Bangla Deshi expert, notes that microfinance loans have to be repaid starting one week from receipt of the loan, in weekly installments. How many businesses can make profit within one week, in order to repay the loan?  Even philanthropic microfinance companies charge 12-15 percent interest – the rate of interest that the government of Ireland is struggling to pay.  How many poor people taking microfinance loans have the business expertise to know how to run businesses, especially in hard times, during the global crisis?  Lending the poor money is not enough; they need to learn about basic rules of business as well. Why is this not provided together with the money? 

     Collapse of microfinance will mirror the collapse of investment banks – only it will be the poor who pay the price, not the rich.  It could, and should, be prevented.