While mortgages were a major source of debt-based money issue in the latter half of the twentieth century, debt was also being seen as an instrument of social policy. Given that debt has been so central to the development of modern economies, it is not surprising that debt should be seen as an agent of economic development. Hernando de Soto has long promoted the idea of granting property rights to poor households so that they have assets against which to raise credit at a reasonable price (2000:24).
As a policy instrument, the use of debt to enhance development gained its most public profile through the work of Mohammad Yunus and the idea of microcredit.
In 1976, Mohammad Yunus gave small loans to buy working materials to some craftworkers in Bangladesh who were being forced to borrow small sums from traders and money lenders at extortionate rates. Yunus’s loans substantially improved the economic viability of the borrowers and the loans were readily repaid. This led to the founding of the Grameen Bank in 1982. By 1998 it had over a thousand branches employing around 12,000 people lending to more than 2 million borrowers. Loan defaults were very low initially at around 2 per cent but rose somewhat over time (Affleck and Mellor 2003:33). The principles of microcredit are that loans are very small and borrowers are not required to demonstrate prior possession of savings or collateral. In fact, loans are targeted at those who do not have assets or banking access.
Under the Grameen principle, borrowers are brought together in small groups and collectively guarantee repayment. This puts considerable peer pressure on individual borrowers and also has the effect of putting the risk and costs of default on to the borrowers themselves. Interest rates are quite high for borrowers, although still much lower than money-lender rates. This is because
the loans have to cover administration and training costs which are high in relation to the small sums being handed out. Yunus was awarded the Nobel Peace Prize in 2006 and his movement has spread even to the heart of capitalism in New York City, where a branch has been set up in a low-income area to counter the explosive growth of expensive payday loan companies, cheque cashers and pawn shops. Microcredit became an important aspect of development programmes with a microcredit summit held in Washington DC in 1997 and the General Assembly of the UN declaring 2005 the International Year of Microcredit.
Unlike ‘top down’ development projects, microcredit was seen as a ‘bottom up’ approach enabling people to escape permanently from the bondage of poverty by achieving social change through economic empowerment. It was to be a market solution to poverty (Affleck and Mellor 2006:309). Microcredit would tap the potential for entrepreneurship that was assumed to lie within the community itself. The main barrier was seen as lack of financial access. The market was ready and waiting, all that was missing was some financial credit and business training. Through microcredit people, particularly women, were encouraged to borrow and invest their way out of poverty. Its supporters claim that many millions of people have been helped and that local economies can be invigorated by small scale injections of cash and people can be empowered by taking control of their own livelihoods. By December 2002 there were nearly 70 million clients linked to over 3,000 microcredit organisations and around two-thirds of the borrowers were women (Fernando 2006:1). The centrality of women borrowers is a very notable feature of the microcredit movement, although there is debate about whether it achieves women’s economic empowerment (Pearson 2001:312).
Some commentators argue that the good intentions of the microcredit movement are distorted in practice by the wider framework of financial drivers. As the microcredit approach to development has become more mainstream, it is losing its local and personal focus. As Fisher and Sriram argue, microcredit has tended to become a top down policy, seen as an end in itself rather than a means to other more socially-based development approaches. They
subtitle their book ‘putting development back into microfinance’
(2002). Fernando, in his study of microcredit in Bangladesh and Sri Lanka, also noted that a large number of mainstream banks were entering the field, indicating that microfinance was moving up market with less concern for the very poor. Fernando also notes the pressure that funders were putting on NGOs to show early results from microcredit initiatives. Ensuring success meant excluding the poorest and putting pressure on borrowers: ‘the so-called collateral-free lending practices of the NGOs not only exclude the poorest of the poor but, even more strikingly, also function as mechanisms of controlling and disciplining the lives of the borrowers’ (Fernando 2006:26). Borrowers were often expected to start repayments immediately, rather than allowing enterprises to grow. Overemphasis on microfinance also led some NGOs virtually to become banks.
Fernando fears that notions of bottom up self-help could mask the withdrawal of state responsibility for the needs of the poor: ‘the language of reliance, self sufficiency and empowerment through microfinance appear to be extremely productive given that they simultaneously provide legitimacy for the withdrawal of the state from development, and creates conditions for capitalist expansion’
(2006:21). Fernando points out that at present 80 per cent of the world’s population live mainly within the informal sector without access to finance. If through judicious use of credit these people could be encouraged to create their own economic dynamism, this would have a range of benefits for capitalism. As well as making up for the lack of a welfare state, or the problems of the wider economy, it would help support underpaid workers and, in the longer run, provide new markets (Fernando 2006:17–18).
The main challenge is whether finance through debt can achieve economic development for poorer communities. One of the main aims of microcredit is to create microenterprises that would eventually be able to access mainstream bank credit and grow into larger enterprises that could build a local economy. Margolis suggests that microcredit is not economically feasible for the very poor, and points out that the Brazilian government has had to pick up nearly half the lenders’ costs for a credit programme covering
1.3 million subsistence farmers (Margolis 2007). Another problem is that there may not be the level of untapped entrepreneurship that the microcredit approach would hope. Evidence from interviews with micro-lenders in the UK indicate that making credit available is unlikely to stimulate widespread economic activity, in fact many lenders were having trouble getting their money ‘out of the doors’ (Affleck and Mellor 2006:314). As an earlier study of the formation of worker co-operatives in the face of factory closure indicated, it is very hard for people to enter a market that has already excluded them (Mellor et al. 1988:79). It increases economic pressures on those who are already marginalised within the wider economic community if they also have to take on debt.
Debt-free credit might be more successful, but this is not what is on offer within market oriented microcredit: it is credit as debt.
A more promising aspect of the microfinance movement is to provide funding for social enterprises (Pearce 2003:106). These are organisations founded on democratic principles that trade for social benefit. Such organisations cannot be judged by market tests of viability. They are set up to serve poor communities and the most appropriate form of funding would be a grant or interest-free loan, or a combination of both.