Paying back the debt
In the small South American town of El Alto, Bolivia, Luisa owns and runs an auto-repair shop. Like many in the fast-expanding mountain town, Luisa relies on micro-financing to float her business.
Micro-finance is the currently popular trend in poverty alleviation of getting small loans to those who are impoverished, typically through a non-profit or government agency. By doing so, individuals gain access to money that formerly would not have been available. Micro-financing is very popular nationally and internationally. Unfortunately, there is a growing amount of literature that suggests that micro-finance is not the boost it seems.
Given the socio-economic situation of El Alto, people do not do regular maintenance on their cars, only bringing them into the shop when they are on their last legs. Due to Luisa’s lack of consistent business and reliable income she is often compelled to use her loan to buy basic necessities for her family. In doing so, she spends her loan money on things that do not get a monetary return, forcing her into further debt. Luisa is not unique in this regard. Academic studies carried out in Africa, Vietnam and many other countries find loan recipients in similar circumstances.
Micro-finance organisations are targeted towards those in the ‘informal economy’, those who carry out work off the books – such as garment makers, farmers, or craftspeople. More often than not, these individuals are from impoverished areas and uneducated in the ways of business. In Luisa’s home country, it is estimated that 60 to 80 percent of working-age people work in the informal economy. Almost 70 percent live below the poverty line.
Afforded the opportunity to be given money, the individuals take it. However, a major consideration in understanding the plight of these individuals and the role of micro-finance is education. Ideally, these individuals receive money (typically $US 50 – $US 100) after they take training courses in debt repayment and accepted business practices. Too often this training is skipped over, as are the contracts individuals sign saying that they will use their loans for business purposes only. A study in Bolivia found that roughly 40 percent of the women who took on loans used the money for things unrelated to business practices like food, school supplies and clothing for their children.
Spending like this has no opportunity for debt payback (i.e. is not a technical financial investment) and leads to those that borrow to become over-indebted, meaning that a customer is in a constant struggle to repay on time, finding themselves making heavy sacrifices in order to do so. One study in Mozambique found that 30 percent of borrowers were over-indebted. The very poor are more likely to take out micro-loans but are the people in the worst position to assume such a risk, having the most to lose if their businesses fail.
Another problem arises in the relationships between men and women, wives and husbands. In many countries where micro-financing flourishes, women are disproportionately disadvantaged and, as such, are targeted by financing programs. This is because they have a better record in debt repayment and a higher likelihood than their male counterparts to use the money for their families and communities. Women’s empowerment is a key facet of micro-financing websites and it is estimated that 85 percent of micro-finance customers are women.
While on the surface, this seems like a fantastic opportunity, the reality is that it upsets the culture of household relations. In many economically-depressed cities, the population is growing as more people move with the hope of gaining employment. This increase in population causes an increase in labourers who now see smaller wages as their numbers grow. Many men lose their jobs. This puts pressure on women to take on loans, which challenges the position of the man as the main breadwinner and head of the household. With their role of provider now called into question, many men resort to alcoholism, violence and even abandon their families.
These issues are hard to see from the surface, but a deeper look shows that many women and families are harmed by the micro-finance system. There are positives, however, and this research is not meant to dissuade involvement in the system. It is meant to offer more understanding of a very complex issue. If you are looking to loan money through an institution, it is important to know who is getting the money, the training they are getting for their debt and how exactly the money will be used.
This is an amended version of Micro-Finance and the Issue of Payment published on the medes, an online multimedia publication that seeks to bring awareness to the gamut of human rights issues which receive little to no attention through conventional media outlets. the medes is a project of the Media Action Network (@MediaActionNet).
AJ Oscarson is a graduate student in applied anthropology at the University of Colorado, Denver. In January 2012, he co-founded the non-profit Media Action Network as a way to bring attention to social justice, and is currently Creative Lede and staff writer at the medes. Follow him @AJOscarson.