Ten Years to Realise that Usury Harms the Poor
There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.—Hamlet, Act I, Scene 5
Hamlet was right: life is full of things and we can never understand more than a few things, but there is way to understand quickly by looking at the subject in an abstract manner. Following this method I could easily judge that Micro-finance was a scam that would hurt the poor much moor than it would help them. How did I realise this minutes after hearing for the first time about this practice? I abstracted Micro-finance to its essence: usury.
Let me now point you to a very interesting interview with a gentleman who worked in Micro-finance for ten years. He had misgivings about it from his first job and yet needed ten years to realise how harmful it is. I advise you to read the whole interview, one part stands out for me:
Well, one of the things people say is very important is microsavings, the poor need to be able to save, the poor need insurance, and so on. The poor need all sorts of things – but the problem is that only one thing is extremely profitable for microfinance institutions and their investors: credit.
—Interview with H. Sinclair, Microfinance ‘Heretic’, October 4, 2012
In Micro-Usury shows its Ugly Face I wrote: “A postal bank will slowly introduce the concepts of finance and lending, starting with saving and not borrowing.” When I heard that people want to combat poverty with credit (i.e. borrowing) I quickly realised that Micro-finance is a trap to suck the poor into usury. Unfortunately this gentleman, even after 10 years of experience, thinks that Micro-credit can be improved with regulation. I can only repeat what I already have said:
To understand life first-hand experience without solid philosophical foundation is of little value. The writer thinks that usury-bondage is a wonderful thing, which should be celebrated. She thinks that destroying the family structure of the poorest people in one of the poorest countries in the world is “help”.
Having wealth, power, technology, et cetera. The West decided to make its life easy by rejecting sound philosophy; the result is the decline and imminent fall of the West.
—“They didn’t win the Peace Prize for nothing”-First Hand Account of Grameen Bank, April 28, 2010
Hugh Sinclair makes a perfect case why Micro-credit does not work neither economically nor ethically, I only wish he had realised that in less than ten years.
See also:
- Micro Credit is Usury, why Grameen Bank is not helping the poor.
- Confessions of a Microfinance Heretic, blog of H. Sinclair.
- Beware of Bad Microcredit, September 2007, there is no good Micro-credit.
Dear Anonemiss,
Fair points. I agree with the premise that the majority of microfinance is usury. Is it ALL usury? Was it ALWAYS usury? Is there ANY role for credit-provision to genuine but poor entrepreneurs in developing countries? These are questions to debate. I urge the reader of my book to not throw out the baby with the bathwater, but I equally suggest we are talking about a small baby in a very large bath. However, I wanted to respond to a comment you made: “He had misgivings about it from his first job and yet needed ten years to realise how harmful it is”.
I entered the sector naive, lacking the wisdom you possessed from the outset. I initially thought I was “unlucky” in Mexico to work with a questionable institution. I went to Mozambique and saw yet more corruption and useless (or harmful) microfinance. Very unlucky. I thought that working for a microfinance investment fund, helping them to detect these dodgy banks from their air-conditioned offices in Europe would be useful. I discovered these funds are often as bad as the worst MFIs. The curruption, spin and awareness of these atrocities stretches from the bottom of the sector to the very top. I would suggest it took me perhaps 5 years to realise this, and the temptation to walk away at this stage was strong. Many had done so. But quitting solves nothing. I tried to influence this from the inside, to leak stories to the media, to raise awareness of the atrocities.
Simultaneously I began working with the few clean guys out there who are trying to do something valid. They do exist. Are they perfect – no, but what is the alternative? To walk away is to abstain, and to allow the sector to be entirely taken over by the vultures I describe in graphic detail with full names and excruciating detail regarding how and why they engage in these practices, while maintaining the facade of microfinance to the naive people who continue financing this sector. People as naive as I was a decade ago.
Over the last five years I have contributed, hopefully, to some of the better cases of microfinance, some of the more ethical players. Obviously this is also nonsense if you claim that ALL microfinance is harmful. I am not quite ready to discard the entire sector. But to the extent that I have woken people up to the magnitude of the atrocities that are taking place (alongside other valued critics), then I believe this is a genuine contribution to the poor. Is reducing harmful practices a contribution of sorts?
There are glimmers of hope, but I am not cracking open the champagne quite yet. The book has attracted the attention of many of most senior people in the sector, extensive media attention, and if this serves simply to inject an element of fear into the worst operators, then it has served its purpose. I am sad that this is the “upside”, but I’m glad I did it.
A Dutch TV program beamed a documentary about corruption in the Dutch microfinance investing sector into the living-rooms of a quarter of a million Dutch people last month, and has led to 9 questions related to misuse of tax-payer funding in microfinance in the Dutch parliament. This was based on my book, and has at least raised awareness of the dangers of microcredit. Will this lead to an improvement? I don’t know, but what more can I do? If the Dutch tax-payer and government wish to pump tens of millions of euros into futile microfinance institutions even when they are aware of their futility, who am I to disagree?
We need to have this debate. Many of us, lacking your innate wisdom, have been duped by the microfinance sector and its powerful spin lobby. I’m sorry it took so long for my eyes to be opened, but they are open now, and I am doing what I can to open the eyes of others, to get this debate moving, and to improve the lot of the poor. Can we fix it? I suspect only with a substantial cull, but I would stop short of proposing the total elimination of all microfinance. The question is whether the commercial model works at all. For as long as we fret about return on equity and portfolio yields rather than about whether microfinance is actually having any impact on the lives of the poor, I am pessimistic. But not everyone focuses on these metrics, and my fear is that the few good players in the sector are tainted with the same brushstroke as the scum that have, alas, come to dominate the “miracle cure for poverty”.
I believe my heretical act may have served a positive purpose. Many of the vultures are extremely angry with me, which is proof of some success. Many die-hard critics of microfinance suggest I didn’t go far enough. I believe, and hope, that the book will open the debate to include the microfinance investment funds, who had been previously immune from scrutiny, but I believe are the principal culprits for the damage microfinance has caused. I hope it has placed serious concern of microfinance into a broader field beyond practitioners and academics. So, don’t just read an interview, read the book, and then let’s have a chat!
To become a heretic you have to first have been in the cult.
Hugh Sinclair
October 26, 2012 at 7:00 pm
First, I would like to thank you for taking the time to reply to my criticism. I did not intend for the post to be a personal attack on you, I am sure you know the feeling of frustration of seeing everyday what you think as harmful being celebrated. I intended this post to be an introduction to my more extensive discussion of micro-credit and usury in general.
Second, I will admit that it is entirely unreasonable to demand that a Westerner should be guarded against usury, when we live in an age that regards it as given dogma and anyone who oppose it as a heretic or even a lunatic. It is also unreasonable to demand that a person should instantly analyse his environment and draw the right conclusion. Many people who find themselves in similar situation need years to realise the truth about it. In my post I was venting my frustration that the whole world has not started to criticize not only micro-finance that harms the poor of poor countries, but also usury that harms the people of the developed world.
Third, I congratulate you on taking action to improve the situation; many people do nothing and others who want to do something lack the means. I, for one, have only this blog to contribute. Now it is true that I think all micro-credit is harmful, that is not to say that poor countries can not use a solid financial institution. I detail certain conditions in another post (quoted above). I nonetheless am totally convinced that no Western plan to help the poor in Africa, South-East Asia, etc will ever amount to anything, indeed I believe the overwhelming majority do more harm than good. The well-known economist Michael Hudson has already proven that much more money is extracted from Africa than aid to it (see link to his website in the blogroll).
Fourth, I wanted to comment on the Dutch TV show and Dutch attitude to foreign aid (I speak Dutch), but I could not play the show beyond the first minute and I did not want to start a tirade against the Dutch or this post would have become really ugly really quickly.
Fifth, I have no “innate wisdom,” as this blog title clearly explains I am applying sound philosophy to understand the world better. I have written lengthy posts (thousands of words) on usury, those were the result of a very long study that took years and ranged from studying ancient history to modern economics. I think I needed much more than ten years to be able to instantly recognise the harmful nature of micro-credit, but philosophy like mathematics is easily transferable to other problems and situations without the need for a lengthy study each time. This post like most on this blog is really about the lack of sound philosophical study in modern Western society.
Last, I am not one of those who thinks you didn’t “go far enough,” on the contrary I think you have gone as far as possible with micro-credit. I will love to read your book if you are willing to send me an electronic version. Thanks again for your comments.
anonemiss
October 26, 2012 at 9:19 pm