In the 1970s a new method of helping the poorest people in the world emerged: microlending. The idea is to give the very poorest people, those who live on less than two dollars per day, very small loans they can use to start businesses and serve their community. Thanks to the power of success stories and anecdotes of those helped by microlending, the idea caught on with philanthropists and governments in the west. The concept enjoyed the full throated endorsement of the Clintons, The Nobel Committee, the United Nations, and experts working in global development. But a dark side of microlending quickly emerged. Some loans came with unreasonably high interest rates. Certain microlending institutions harassed and threatened those who couldn’t pay. Some of those who received small loans found themselves trapped in a debt spiral. The indebted even committed suicide to escape the loan. While this was going on, some owners of microfinance ventures profited to the tune of millions of dollars. In the 2010s, multiple studies began to discover that the benefits of microlending as a poverty cure were vastly oversold. Microloans could in fact improve a community’s economic base in certain situations. But they cannot and will not end poverty entirely, as its advocates claimed decades earlier.
How did the most powerful, wealthy, and influential people in the world buy into the exaggerated promises of microlending?
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REFERENCES
Banerjee, Abhijit and Duflo, Esther (2011) Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty
Bateman, Milford (2010) Why Doesn’t Microfinance Work: The Destructive Rise of Local Neoliberalism
Edited by Bateman, Milford and Maclean, Kate (2017) Seduced and Betrayed: Exposing the Contemporary Microfinance Phenomenon
Collina, Daryl et al (2009) Portfolios of the Poor: How The World’s Poor Live on $2 a Day
Meyerowitz, Joanne (2021) A War on Global Poverty: The Lost Promise of Redistribution and the Rise of Microcredit
Rahman, Aminur (1999) Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?
http://users.nber.org/~rdehejia/!@$devo/Lecture%2006%20Microcredit/extra/RAHMAN,%20A.%20Micro-credit%20initiatives%20for%20equitable%20and%20sustainable%20development%20who%20pays.pdf
In 1997, the American banker Vikram Akula was inspired by the hottest trend in global development, microlending.
The idea is simple enough, create firms that loan very small amounts of money to the most desperately poor people in the world and thus give them the means to grow financially.
Akula decided to use the concept to tackle poverty he witnessed while visiting his relatives in India.
His firm, SKS Microfinance, grew rapidly and attracted investments from major venture capitalists like Sequoia Capital and George Soros.
In 2003, SKS became a for-profit company and eventually loaned hundreds of millions of dollars to millions of impoverished people.
In 2010, SKS debuted on the Bombay Stock Exchange with an initial public offering that raised $350 million.
A few months before the IPO, Akula had sold all of his SKS shares, worth about $13 million, in a private sale.
But while some in the global development world celebrated the idea that extreme poverty reduction could be highly profitable, something dark was happening.
According to a report commissioned by SKS themselves, its debtors repeatedly died by their own hands.
The fault was the aggressive collection practices of SKS.
SKS employees verbally harassed over-indebted borrowers, forced them to pawn valuable items, and incited other borrowers to humiliate them.
In some cases, the SKS staff physically harassed defaulters.
Only in death would the debts be forgiven.
One woman was given $3,000 in loans but only made $12 a week.
An SKS loan agent told her to prostitute her daughters to pay for the loans.
She drank pesticide and died the day afterward.
Another SKS debt collector told a delinquent borrower to drown herself in a pond if she wanted her loan waived.
The next day she did.
She left behind four children.
One 18-year-old girl was pressured to hand over 150 rupees, worth about $3, which was meant for a school examination fee.
She also drank pesticide.
Her suicide note stated, Work hard and earn money.
Do not take loans.
While the abuses of microfinance were being exposed, researchers began to question the premise of the entire industry, that it could cure poverty worldwide.
It turned out that the upside of microlending was greatly exaggerated.
Over the previous decades, this exaggeration came from the most powerful people in the world.
Presidents, Prime Ministers, royalty, billionaires, the Nobel Committee, and the United Nations.
They were all sold on an idea that could never live up to its promises.
I'm Travis Few, and this is Triple Down, a podcast about what happens when bad ideas flow from the top.
With me are Julian Field and Jake Rokitansky.
Episode 10, "Little Loans."
While the rate of extreme poverty in the world has increased significantly over the past few decades, it's
frustratingly persistent.
And considering just how much wealth there is, it also seems unnecessary.
There were lots of development programs that were attempted in the 20th century with a Varying degrees of success in the attempts to solve this problem.
But in the late 70s, an economist named Muhammad Yunus came up with a solution.
He thought that the poor weren't able to improve their circumstances because they were frozen out of the financial system.
While the rich and middle class have access to a variety of financial services that they can use to make themselves richer, Very poor people often lack even a bank account and consequently they can't get loans that might give them a leg up.
This is despite the fact that the amount that they need for a better economic outlook is usually very small, often less than $100.
So Mohammed Yunus developed a system of microlending.
Or providing very small loans to poor people that banks would normally never consider.
And the idea caught on until it basically became a worldwide movement, eventually grabbing the endorsement of all the biggest names in global development and philanthropy.
The Bill & Melinda Gates Foundation, the Clinton Global Initiative, Oprah, Bono, the United Nations, they all got on board with the idea that small loans to the poorest people was going to be the silver bullet for ending global poverty forever.
Not a red flag at all that they're all involved.
Definitely, we just need more, you know.
First of all, the market should not be questioned.
That's not the issue.
Clearly, it's the access to credit, to being in debt.
We haven't allowed poor people to be in debt.
That's the idea.
It's like, we can collect on those debts with a little bit of interest, you know.
You can take a little bit for yourself.
So it turns out that while the economic effects of microlending aren't zero, it's far from a cure-all.
And when you're trying to solve a problem as big as global poverty, there's nothing wrong with trying new ideas or bold ideas.
But when you promise an idea like microlending is going to solve global poverty and it falls far, far short of that goal, it seems like there should be some kind of reckoning or a post-mortem so that we can understand why all the biggest brains in the world bought into this idea that just didn't work as advertised.
But that hasn't happened.
It seems like everyone involved just kind of like shrugged their shoulders and moved on.
Oh, another financial product that's just adding to the damage.
Yeah.
So today I'm going to talk about the fascinating rise and not quite fall of microlending.
Hey there, you've been listening to a sample clip of Trickle Down.
This is a side project that I've been working on.
It's a 10 episode series about misinformation and bad ideas that flow from high authority sources.
I think it's fascinating and I mean it's a way for I guess me to explore the way people who should know what they're talking about don't always actually.
I'm not gonna lie some of it's kind of a bummer but if you're anything like me that's actually more of a reason to dive into the subject matter.
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