Top LSE anthropologist says microcredit only piles up poverty

Far from being a cure-all, small loans add to poverty by burdening people with unsustainable debt, says Jason Hickel.

"What’s so fascinating about the microfinance craze is that it persists in the face of one unfortunate fact: microfinance doesn’t work," says Hickel, who teaches anthropology at the London School of Economics.

In an article in 'The Guardian" headlined "The Microfinance delusion", Hickel says: "Most microfinance loans are used to fund consumption – to help people buy the basic necessities they need to survive.

“In South Africa, for example, consumption accounts for 94% of microfinance use. As a result, borrowers don’t generate any new income that they can use to repay their loans…

“So they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt."

Hickel draws on a DFID study and a new book on the subject by David Roodman of the Centre for Global Development.

“The best estimate of the average impact of microcredit on the poverty of clients is zero,” says Roodman in his book.

A comprehensive DFID-funded review of extant data comes to the same conclusion: the microfinance craze has been built on “foundations of sand” because “no clear evidence yet exists that microfinance programmes have positive impacts.”

When micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand, says Hickel in his 'Guardian' article.

"After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding no net increase in employment and incomes."

He argues that is the "best of the likely outcomes."

"The worst – and much more likely – is that the new businesses fail, which then leads, once again, to vicious cycles of over-indebtedness that drive borrowers even further into poverty."

Hickel argues that the only gainers in the microfinance business are the lenders.

"The only consistent winners in the microfinance game are the lenders, many of whom charge exorbitant interest rates that sometimes reach up to 200% per annum (as in the case of Banco Compartamos). In the past we would have called such people loan sharks, but today they’re called microfinance providers, and they crown themselves with the moral halo that this term carries."

Hickel is unusually scathing when he says: "Microfinance has become a socially acceptable mechanism for extracting wealth and resources from poor people."

But Hickel admits that microfinance retains its attraction as a development option despite its failure being recognised at even the highest levels.

He has some explanations for that.

"Because it promises an elegant, win-win solution to the problem of poverty, it assures us that we – the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing arrangements of political and economic power. "

"In other words, it promises revolution without the messiness of class struggle. And, what is more, it promises that we can help save the poor while making money from it. It’s an irresistible tale."

Hickel says microfinance is also a "a very effective tool of political control."

"It’s the neoliberal development strategy par excellence .... Bankers shall be our new heroes and debt our salvation. Debt, incidentally, is a great way to keep people docile."

Milford Bateman, one of the most compelling critics of microfinance, had earlier pointed out  that the movement had its roots in the US government’s “containment strategy” in Latin America.

Hickel says microfinance will never work unless "background conditions producing poverty" are addressed .

"We also need to set up the right systems for small businesses to succeed, such as strong subsidies, state assistance, and welfare support to prop up entrepreneurs when they fail – the very systems that neoliberalism has convinced us to abandon."

Hickel advocates 'direct cash transfers' rather than microfinance works much better in fighting poverty and argues that has worked in many countries.

"Direct cash transfers, with no strings attached, not only deliver success where microfinance fails, they appear to be the single most impactful anti-poverty intervention available. Experiments with basic income grants have been conducted in Namibia, Mexico, South Africa, Indonesia, and elsewhere, all with astonishingly good results,” he said.

"They smooth out consumption deficits, improve health indicators, and allow people to start small businesses that are successful because they can take advantage of increased local demand," he added.