Micro-Usury Shows its Ugly Face

First they were stripped of their utensils, furniture, mobile phones, televisions, ration cards and heirloom gold jewelry. Then, some of them drank pesticide. One woman threw herself in a pond. Another jumped into a well with her children.

Sometimes, the debt collectors watched nearby.

More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the government of the south Indian state. The state blamed microfinance companies — which give small loans intended to lift up the very poor — for fueling a frenzy of overindebtedness and then pressuring borrowers so relentlessly that some took their own lives.

—Lender’s own probe links it to suicides, Associated Press, Feb 24, 2012

People in the West consistently get manipulated by sophisticated media campaigns into supporting the most harmful measures all in the name of lifting people out of poverty and saving the world. Sooner or later these romantic dreams are crushed on the rocks of reality, unfortunately its the poor who suffer and not the Western audience.

Early in 2010, before the suicides story broke out I wrote in Micro Credit is Usury against micro-finance. My post concentrated on Grameen Bank and did not really argue its title. The reasons I condemned micro-finance are easy to comprehend:

• A large number of people in poor countries do not use any kind of financial service. Micro-finance is the wedge used to get these people into the hands of finance.

• People offered micro-finance were outside of the cash market, but had to pay the loan with cash. Historically state violence was used to push people to the market, for example by imposing cash taxes on subsistence farmers.
• Historically finance was spread by providing saving accounts and not credit. In Europe and Japan most villages had only a post office, were they could open a saving account (see Postal savings system on Wikipedia). This helped capital formation and enlarged the national capital market (see my previous post).
• Credit is not used to build equity in the villages. This is an important point, best illustrated by the example of an early adapter whose case is used by Grameen Bank in the media: a woman bought a mobile phone with her loan and earned money by renting the calls. She did not invest in the village, she brought a new consumption to the village. She earned a lot of money that she used to buy land and build a house. The village production capacity did not increase due to the loan.
• Poor people who never borrowed money had no understanding of how interest works. Actually it seems that few people and even less governments have any understanding how credit, finance and interest works. This meant abuse will happen.
• The more money you borrow the cheaper the rate you pay. This meant that the poorest people in the world are going to pay some of the highest legal rates in the world; not really a recipe for lifting people out of poverty.

“About 40 million people in Bangladesh have availed of loans from microfinance organizations whose interest rates can be anywhere between 20-40%. There are some micro financers who also charge interest rates of more than 50%,” Said Khandakar Muzharul Haque, the executive vice chairman of Micro Credit Regulatory Authority. “We want to structure and regulate this interest rate.”

—Microlending Backlash Spreads to Bangladesh, Wall Street Journal, November 10, 2010.

• The most important point is: Grameen Bank was not self-sustainable and the commercialisation of this practice would inevitably mean that the human mask falls off and the real face of usury is shown.

The Indian lenders are stock-traded companies with shareholders to satisfy:

The shares of SKS – which is in some sense the main offender, if it is an offense – are worth less than half of what they were at their highest, and even far below what they were at their public offering which was just in August.

—Malcolm Harper in An Interview with Malcolm Harper, December 14, 2010

Despite Muhammad Yunus (of Grameen Bank) statements against the new breed of “high-profit, high growth” micro-lenders (see WSJ article quoted above) he has used the bank to build a commercial business that have brought him as much wealth as the fame that he got from micro-finance:

A Bangladesh government-appointed investigation last year found that Grameen Bank violated its charter as a microlender by creating affiliates that did not benefit the bank’s shareholders, and recommended the government integrate those affiliates with the bank.

Yunus maintains those social businesses are independent and should remain so.

—Bangladesh to probe Grameen Bank units, Bloomberg Businessweek,  April 23, 2012.

The Wikipedia article Grameen family of organizations gives an idea about the extent of those organisations. The not-for-profit label does not mean that Yunus and other directors of these organisations were not highly compensated. I am not accusing Yunus of anything illegal, but my problem with him goes beyond misguided idealism or humanising usury; as the following interview shows he is either delusional or a liar:

Q: Do you think Grameen Bank itself has lived up to its own hype?

It depends where you are coming from and what you are looking for. We’re very happy with what Grameen Bank has done. It’s owned by the poor people. It lends to the poor people. It’s self-contained. It doesn’t borrow any money from anybody.

—5 Questions with Muhammad Yunus, CNBC, 1 Mar 2012. [my emphasis]

While the balance sheet of Grameen Bank clearly shows that Deposits and Other Funds were 87% of liabilities in 2010—a deposit is a loan to the bank—while loans were only 54.5% of the bank’s assets. There is also a whole category called Borrowings from banks and foreign institutions, which in 2010 was 1.27% of liabilities. Apart from borrowings the organisation received foreign aid for many years. The use of aid money was investigated:

“It seems that the dispute regarding use/transfer of Norad aid funds for Grameen Bank has been settled. But the fund transfer to different organisations by Grameen Bank was beyond its authority (ultra vires),” the report said, a copy of which is available with bdnews24.com.

—Grameen fund transfer ‘ultra vires’: inquiry, Apr 25th, 2011.

If poor countries like India want to develop their market and their financial sector they must do it in way that provides benefit to the maximum number of people and not profit to the minimum number of people. There are some simple steps that any country can take to develop their economy and liberate the productive forces for the enrichment of their people:

1. Open the mint to gold and silver. This can be easily done by any country, the cost of minting is minimal.
2. Recognize gold and silver coins as legal tender.
3. Issue government gold bonds.
4. Establish a Post Bank and give it monopoly in low-population areas.
5. Invest in developing agriculture and  the productivity of villages.

The first is crucial; sucking people into the cash market under a fiat currency regime is the set up for a shakedown. Indians hold about 20,000 tonnes of gold, that would make about 5 billions of my zimbi coin. Gold bonds would act like magnets pulling the gold from the necks and hands of Indians brides and channelling it to the capital market. Spending that money on the bureaucracy or big white elephants would send the country down the path of revolution; funds raised by gold bonds should be spent on improving the basic infrastructure of the country and not providing more cheap services for the urban wealthy.

A postal bank will slowly introduce the concepts of finance and lending, starting with saving and not borrowing. The monopoly would limit costs and insure a tight regulation oversight. Even a developed country can benefit from a post bank, as the experience of New Zealand shows:

Postal banks are now thriving in New Zealand, not as a historical artifact but as a popular new innovation. When they were instituted in 2002, it was not to save the post office but to save New Zealand families and small businesses from big-bank predators. By 2001, Australian mega-banks controlled some 80% of New Zealand’s retail banking. Profits went abroad and were maximized by closing less profitable branches, especially in rural areas. The result was to place hardships on many New Zealand families and small businesses.

The New Zealand government decided to launch a state-owned bank that would compete with the Aussies.

—Saving The Post Office, January 13th, 2012 [my emphasis]

See also:

• Bacon on Usury, refuting Bacon’s arguments in favour of usury.
• Posts on the subject of usury.
• Bagehot on Money, a five part series about finance and how banks works.

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