Microcredit drives poor households into debt trap


While individuals like Muhammad Yunus, Queen Maxima of Holland, Queen Rania of Jordan and many others have been pimping in favor of microcredit (otherwise known as microfinance, microlending, or microcapital) claiming that it is empowering women and helping recipients to graduate from welfare programs, experts say the microcredit has not increased incomes, but has driven poor households into a debt trap and in some cases even leading to suicide. It has also been alleged that a large portion of microcredit borrowers are forced to sell their body organs – especially kidneys and livers for repaying loan while honchos of microcredit enterprises are directly connected to transnational human organ trafficking rackets.

Back in 2010, microcredit came under intense scrutiny when a large number of Indian farmers committed suicide in Andhra Pradesh state. The global community connected the suicides to the excessive pressure of lending institutions on Indian villagers to repay exploitative loans. These suicides sparked global controversy about the lack of regulation in microfinance, which had allowed institutions to exploit the poor in the name of third-world development.

According to experts, generally, banks only offer loans to people who can provide collateral in case they default on their loan payments. As a result, people without traditional forms of collateral are usually unable to borrow sizable amounts of money to invest in a business. Additionally, their financial standing is damaged by investments considered ‘irresponsible’ by lending banks, such as the payment of dowries. People who do not qualify for formal loans often participate in informal savings systems which have limited funds, rigid requirements, and little security (CGAP). ‘Loan sharks’ often exploit the poor, extorting their money by capitalizing on their lack of other financial options.

Microcredit was pioneered in Bangladesh, which experienced extreme poverty for decades. In 1974, Bangladesh experienced widespread famine and countless Bangladeshis died in the streets as the government struggled in vain to provide enough food. At the time, Muhammad Yunus was an associate professor of economics at the University of Chittagong, in southeastern Bangladesh.

Yunus claimed, witnessing the suffering inspired him to investigate why Bangladeshis were unable to feed themselves. He visited the nearby village of Jobra and brought students to help improve its farmers’ agricultural productivity. While working with the villagers, Yunus discovered that the very poorest were trapped in a cycle of borrowing-and-repaying to make a living and were unable to advance because they had no capital of their own. Specifically, Yunus observed women whose entire income came from making bamboo stools but who earned only pennies each day due to exorbitant interest rates on their raw materials. He learned that these 42 women owed a total of US$29 to their suppliers, and that their permanent debt prevented them from earning any profit. Yunus felt ashamed that such a small amount of money was stopping the women from escaping the cycle of debt. Realizing that the villagers already had marketable skills that required no further training (farming, cooking, sewing), Yunus decided that they needed access to loans with reasonable terms.

Lately, internationally acclaimed Danish investigative journalist Tom Heinemann through a documentary film has exposed lies of Muhammad Yunus proving – Yunus has been fooling the world by falsely claiming that the first borrower of Grameen Bank – Sufia Begum had achieved economic self-sufficiency and had built a multi-story house at Jobra village in Bangladesh – the birthplace of Grameen Bank.

Controversial Nobel Prize laureate Muhammad Yunus and Queen Rania of Jordan. Image credit Jordan Times

Still, Heinemann’s documentary film did not attain due coverage in the international media as exorbitant-interest-based microcredit business is run by several influential individuals in the world – while Yunus has been enjoying patronization from many important figures, including Hillary Clinton – former US First Lady and Secretary of State. Later it was exposed through investigative reports published in Blitz proving – Muhammad Yunus has been one of the key donors of Clinton Foundation where he donates millions of dollars. This donation is enabling Yunus in getting patronization and support from the Clintons. It was also reported in the media that Clintons had exerted influence on the Norwegian Nobel Prize Committee in jointly awarding Grameen Bank and Muhammad Yunus with this prestigious prize.

Microcredit in India

According to a 2012 research paper, as a country with a significant poor rural population, India has attracted many microcredit enterprises. In 2010, India had an estimated population of 1,170,938,000. In 2005, approximately 42 percent of Indians lived below the World Bank’s official poverty line of US$1.25 per day, and 24 percent below US$1 per day. Approximately 90 percent of Indians lacks access to formal financial services, and their desire and need for microfinance has attracted many lending institutions.

In fact, from 2003 to 2009, the number of microloans extended to the poor in India grew from 1.0 million to 26.7 million. As of January 2011, India’s microfinance sector was valued at approximately US$7 billion. Interest rates vary across the country, from an annual rate of 24-30 percent to the high but not uncommon rates of 36-120 percent. Until 2012, the microfinance industry of India was highly regarded as a viable and efficient means of offering banking services to the poor.

Andhra Pradesh, India’s fifth largest state with an estimated population of 80 million (in 2012), is one of India’s poorest provinces and thus a major center for microfinance enterprises. A third of all loans in India are made in Andhra Pradesh alone, holding a value of approximately US$2 billion (as of 2010). The microfinance industry of Andhra Pradesh grew very quickly, resulting in a rapid and widespread increase of borrowers who use multiple loans. In fact, about 83 percent of households in Andhra Pradesh received loans from more than one source, including moneylenders. This phenomenon is troubling because it implies that borrowers were not fully aware of the magnitude of their various debts. The Indian government estimated that households in Andhra Pradesh had an average annual income of US$1,060 but an average debt of US$660 (2010).

During the summer of 2010, a number of Indians committed suicide after defaulting on their microloans. International media immediately focused on Andhra Pradesh because the state represented a large portion of India’s microfinance industry, and found that most of the suicide victims in Andhra Pradesh were rural farmers. Many journalists concluded that the suicides could be directly connected to the farmers’ inability to repay debt. The deaths represented the largest crisis in the history of India’s growing microfinance industry because they revealed deep flaws in a previously unchallenged practice. The crisis sparked investigations into corruption in Indian microfinance industry as well as research on different loan programs worldwide.

According to The New York Times, in early 2010, the microfinance industry of India began to receive a great deal of criticism when a major lender revealed that its major goal was the maximization of profit. SKS, a powerful microfinance institution throughout India, issued a document that showcased the potentially enormous profit that it could make in microfinance and proposed considerable pay increases for company executives. The Indian media widely publicized the document, criticizing the company for its unabashed interest in profit. Conflict escalated over the summer as more people investigated the methods and questioned the intent of SKS.

During the summer of 2010, a sense of defiance grew in the borrowers, encouraged by politicians who “egged on [borrowers to default on their loans, accusing] the industry of earning outsize profits on the backs of the poor”. Defaulting, previously seen as a shameful report of disability, came to represent a social statement on borrowers’ rights. Thus, as defaulting became a means of protesting unjust lending practices, Micro Finance Industry (MFI)s lost a crucial element of their industry: the concept that the social humiliation of defaulting on a loan would encourage repayment. Head of India’s Microfinance Institutions Network, loan recovery in Andhra Pradesh reached an astonishing low of 10 percent during the crisis. In response, banks and investors drastically reduced funding for MFIs in order to avert major financial loss. Over just a few weeks, the nationwide default froze the liquid assets of local lenders by virtually stopping both loan repayment by borrowers and investment from larger banks (much like the subprime mortgage ‘meltdown’ in the United States).

While the microfinance industry slowed to a halt, reports of Indian suicides began to receive attention from the international media. By late 2010, over 200 Indians had killed themselves; significantly, all were indebted to MFIs and other lenders. Onlookers interpreted the suicides as attempts to regain control in the face of overwhelming shame; in this case, critics argued that the Indians were ashamed of their inability to repay debt. Many blamed the MFIs’ questionable lending practices for the recent defaults. Reports by the Indian government attribute the suicides directly to “pressure put by the micro-finance institutions for repayment”.

Microcredit in Bangladesh

During mid-1970s, Muhammad Yunus succeeded in introducing microcredit in Bangladesh by branding it “collateral-free institutional loans extended to jointly liable group members for self-employment. Yunus claimed, the program was “launched to provide small loans to the poor and those people who were generally excluded from formal financial services”. Due to effective PR (Public Relations) capabilities of Yunus, this program soon gained widespread recognition. Since then, it has been in function. However, impact of this program has drawn much controversy over the years. Advocates of this program argue that it reduces poverty, creates employment and generates income. They say, the program eventually results in improved nutrition and improved education of the borrowers’ children, and empowerment of the women. Moreover, it is argued that microcredit program has continued to benefit the poor by raising household welfare.

According to economic experts, microcredit program has not increased incomes in Bangladesh. Instead, it has driven the poor households into a debt trap. In fact, there are large number of cases in which it even led the borrowers to suicide or forced them in selling body organs for repaying high-interest loans.

Most alarming fact is – microcredit enterprises were dealing with rural poor women, most of whom are illiterate. This has enabled the microcredit enterprises in getting documents containing tough repayment terms signed while giving them loans. Later, those destitute women realized – they have fallen victims of loan sharks.

According to BBC, Dr Qazi Kholikuzzaman Ahmad, chairman of Palli Karma Sahayak Foundation (PKSF), a body that monitors microfinance, describes microcredit as a “death trap” for the poor.

He explains how poor people often take up the loans without thinking of the consequences, and that 60 percent of borrowers take loans from several sources.

“There is no understanding that it might take 10 or 20 years to repay their loan”, he said.

Furthermore, from the weekly repayments, some lenders deduct 10 percent of that payment for compulsory saving schemes – money the company then uses to lend to other people.

“Interest on repayments begin at around 15 percent, but it is a flat rate and can soon rise to anything between 40 percent and 100 percent”, Dr Ahmad said.

BBC said, villagers are sending their children to work to help them make the repayments.

But when they are still unable to pay enough, the debt collectors insist that they sell their cattle, chickens and other household items.

Selling agricultural land is also considered as a last desperate option.

Villagers complain of harassment from the debt collectors and there have been allegations of physical assaults.

Because field officers are judged on repayment rates, they sometimes use coercive and even violent tactics to collect instalments on the microcredit loans.

Evil clutches of microcredit

According to a 2022 Bloomberg report, in Cambodia, the average loan provided by so-called microfinance institutions has ballooned sevenfold over the past decade to about US$4,200, almost three times the country’s average household income, data compiled by the Cambodia Microfinance Association show. Women there have been pressured to sell their homes to repay loans, according to human rights groups and academics who have studied the matter.

In Jordan, one of the few countries that still imprisons people for nonpayment of debt, more than 23,000 women were wanted by the police in 2019 for owing less than US$1,400 each, Justice Ministry officials have said.

In Sri Lanka, consumer-advocacy groups estimate 200 women indebted to microfinance companies committed suicide in the past three years.

Yet the World Bank, the European Investment Bank, the US International Development Finance Corp. and other development banks continue to invest billions of dollars of public money. More has come from commercial banks and impact investors. Citigroup Inc. had lent about US$1 billion to 89 microfinance institutions as of January 2020. Japan’s Sumitomo Mitsui Financial Group has invested billions of dollars in Asian firms, including in Cambodia. JPMorgan Chase & Co. sold a US$175 million collateralized loan obligation in 2019 backed by microfinance and small-business repayments. Among the 26 lenders it’s funding are three accused of pressuring borrowers to sell land in Cambodia.

Development banks say microfinance remains the most effective way of reaching the poor, who might otherwise borrow from loan sharks, and that the vast majority of the more than 5,000 microlenders behave responsibly. But even conscientious lenders have struggled to make a lasting improvement in the lives of the poor, a number of academic studies have found. That was also the conclusion of a 2021 Government Accountability Office report that said the US$1.1 billion budgeted by the U.S. Agency for International Development for microfinance programs from 2015 through 2018 had produced “little evidence of sustained effects”.

In Mexico, Compartamos Banco México is now the largest microlender in Latin America, with more than 2.5 million customers. It has 40 percent of Mexico’s microfinance market and is one of the country’s most profitable financial institutions, posting a return on equity in 2019 and 2021 that exceeded 20 percent, according to company filings, almost double what Mexican banks earn on average.

Despite those profits and advertised charges for microloans that put its annual interest rates well above 80 percent, Compartamos Banco México continues to receive US taxpayer money from development bank DFC.

Cambodia is a poster child for what can go wrong. The loan portfolio of microfinance companies there has increased about 13-fold in the decade that ended in 2021, to US$8.7 billion, according to the Cambodia Microfinance Association, as lenders expanded into offering new credit products, including household finance and loans to small and medium-size businesses.

In 2009, LOLC Cambodia, one of the country’s largest microlenders, reported that micro loans accounted for 99 percent of its gross loan portfolio and household finance just 1 percent. By 2018, micro’s share fell to 65 percent and household finance grew to 22 percent, according to a Bloomberg analysis of data compiled by the Microfinance Information Exchange, or MIX, an industry initiative.

By 2020, one in five adults had a microloan, according to a report by industry group Microfinance Index of Market Outreach and Saturation, also known as Mimosa, which gave the country its worst credit-saturation score. When the National Bank of Cambodia imposed an 18 percent rate cap in 2017, lenders increased loan sizes and tripled commission fees, exacerbating the problem, according to an International Monetary Fund report.

Cambodia is also one of the only countries that requires microfinance borrowers to post collateral such as land titles. In a 2020 survey of borrowers, 45 percent said seizing asset collateral was the second-most common means of collecting delinquent loans after verbal reminders, according to the Mimosa report. It warned that “client protection regulation needs substantial strengthening to ensure long-term market sustainability”.

US officials were so concerned about borrowers in Cambodia losing their homes that many argued against subsidizing microlenders that accepted land titles as collateral. “It’s unethical to create secured lending to the poor based on mortgages or land titles because the poor, by definition, can’t repay”, said Wade Channell, a former senior economic adviser at USAID. “What you end up creating is a homelessness project”.

In Jordan, microcredit borrowers are being subjected to draconian law that pushes loan defaulters into prison.

First, the country’s deteriorating economic situation, coupled with its woefully inadequate social safety net, have forced thousands of families to borrow money to pay for food, rent, medical expenses, and other life necessities. By the end of 2019, the average ratio of debt for each household amounted to 43 percent of the household’s income.

The economic crisis precipitated by the Coronavirus pandemic undoubtedly has made the situation even worse.

The second factor is unregulated loans that allow abuse. A simple promissory note – purchased for a few piasters (less than a US dollar) from a store or handwritten – creates a loan contract enforceable in Jordan’s courts that a creditor can turn into an arrest warrant without the borrower even having a hearing before a judge. While the Central Bank of Jordan (CBJ) caps interest rates at 25 percent, informal lenders are not subject to that limit and charge as much as 50 percent.

The World Bank and other financial institutions have invested heavily in microfinance in Jordan, championing easy access to money as a tool of economic empowerment and poverty reduction. These institutions say that they are targeting women because they are an economically marginalized group. However, due to flawed design and implementation, some microcredits made women more vulnerable to debt imprisonment.

As microfinance institutions proliferated, more and more people, and women, in particular, had access to funds, but a lack of regulation and oversight capacity sometimes translated into abusive practices including at some microfinance institutions. Those who received loans often faced exorbitantly high rates leaving them in default. While some of the larger microfinance institutions have made commitments to protect beneficiaries, most do little to vet borrowers before granting loans.

Moreover, many microfinance institutions are not registered and evade regulation by the CBJ, allowing institutions to charge as much as 50 percent interest. This is double the average rate globally, according to an analysis of nearly 2,000 microfinance institutions in 109 countries, which also found that high-interest rates are a central reason why microfinance institutions fail as poverty alleviation tools and that women are charged on average higher rates than men. And while the loans are meant to seed entrepreneurial projects, borrowers generally are personally liable, denying them the possibility of declaring bankruptcy given that Jordan does not have an effective personal bankruptcy law.

As a result, women are particularly vulnerable to debt imprisonment, exacerbating the gender inequalities that microfinance was meant to ameliorate. In Jordan, around 9,000 women are wanted for failure to repay debts that do not exceed US$1,400 each, according to a January 2020 study by Konrad Adenauer Foundation.

According to a 2020 study by Jordan’s Economic and Social Council, the number of individuals wanted for failure to repay debt rose tenfold in only four years, from 4352 in 2015 to 43,624 in 2019.

In August 2020, the official Jordanian News Agency counted more than 3,000 notices for wanted borrowers who allegedly defaulted on their debts between June 30 and July 23 alone. The National Charitable Association for the Rehabilitation of Residents of Correctional Facilities (NCA), a humanitarian organization that provides financial support to enable borrowers who have defaulted to avoid imprisonment, estimates that tens of thousands of such informal loans exist, based on the number of applications they receive per year. Lawyers who provide legal aid to destitute borrowers at risk of imprisonment also estimate that the numbers are in the tens of thousands.

According to Human Rights Watch (HRW), most countries in the world outside the Middle East have abolished imprisonment for debt, not only because it is extremely harsh and violates international human rights law but because it does not lead to repayment. Instead, debt imprisonment targets those without the ability to pay and helps create cycles of endless debt. Imprisonment prevents the individual from being able to earn an income or find the means to repay the debt. All the borrowers interviewed for this report said they did not have the money to repay their debts when they were arrested or charged, and that their imprisonment only made their situations worse. Many said that to avoid imprisonment, they had to sell their household furniture or take on additional loans. Others said they asked their relatives or friends to borrow to pay their loans, entrapping them in debt as well.

Jordanian queen in microcredit business?

Back in May 2007, Jordan’s Queen Rania and Hollywood actress Natalie Portman teamed up to launch ‘Village Banking Campaign’, a major new microcredit program targeting global poverty initially focusing on the Middle East.

But there is bitter truth about Jordanian king’s Palestinian wife – Queen Rania. According to several investigative journalists, Queen Rania and other members of the Jordanian royal family are involved in rampant corruption, loot of public wealth and money-laundering. Queen Rania is also accused of being one of the prime beneficiaries of Jordan’s loan shark – microcredit enterprises.

Meanwhile, according media reports, trove of leaked documents obtained by the International Consortium of Investigative Journalists shows that the country’s long-ruling monarch, King Abdullah II, has secretly owned 14 luxury homes in the United Kingdom and the United States, purchased between 2003 and 2017 through front companies registered in tax havens.  Their value totals more than US$106 million.

The homes include a house in Ascot, one of England’s most expensive towns; multimillion-dollar apartments in central London and three luxury apartments in a complex in Washington, DC, with panoramic views of the Potomac River.

Also included are three adjoining beachfront homes under reconstruction at Point Dume, a posh enclave near Los Angeles. One, a seven-bedroom mansion on a bluff overlooking the Pacific Ocean, was bought in 2014 through one of the king’s shell companies, Nabisco Holdings (no connection to the cookie company), for US$33.5 million.

Advisers to the 59-year-old monarch, who awards an annual prize for transparency in his name, spared no effort to conceal his real estate holdings, the records show. Accountants and lawyers in Switzerland and the British Virgin Islands formed shell companies on the king’s behalf and concocted plans to shield his name from public and even confidential government registries.

On two documents, BVI corporate administrators at the firm Alemán, Cordero, Galindo & Lee, better known as Alcogal,  checked boxes to declare that no one connected to one of the king’s companies was involved in politics – even though the king has the  power to appoint governments, dissolve Parliament and approve legislation.

Jordan is one of the poorest countries in the region. It has almost no oil of its own and precious little water. The kingdom depends on foreign aid to support its own people and to house and care for millions of refugees. In 2020 alone, the United States gave Jordan more than US$1.5 billion in aid and military funding, and the European Union agreed to provide the kingdom with more than US$218 million to soften the blow of the COVID-19 pandemic.

“Jordan doesn’t have the kind of money that other Middle Eastern monarchies, like Saudi Arabia, have to allow a king to flaunt his wealth”, Dr. Annelle Sheline, an expert on religious and political authority in the Middle East, said in an interview with ICIJ.

Sheline, a research fellow with the Quincy Institute in Washington, DC, added, “If the Jordanian monarch were to display his wealth more publicly, it wouldn’t only antagonize his people, it would piss off Western donors who have given him money”.

Experts say Abdullah, whose subjects mock the way he speaks Arabic with an English accent, has little room for error.

Abdullah has long cultivated an image as a moderate and modernizing figure. A motorbike-riding, peace-prize-winning sovereign, Abdullah was educated at the United Kingdom’s Royal Military Academy and the University of Oxford, among other institutions. He assumed the crown in 1999 upon the death of his father, Hussein. The king and his Kuwaiti-born Palestinian wife, Rania, are often described as the Middle East’s most “modern” ruling pair; they met at a dinner party in Amman, Jordan’s capital city, when the future queen and Instagram influencer was working for Apple.

Bordered by war-torn Syria and Iraq to the north and east and the Israeli-occupied West Bank to the west, Abdullah’s Jordan is viewed – at least from the outside – as an island of relative stability. The country of 10 million people is an important U.S. ally and hosted allied military bases during the 2003 U.S. invasion of Iraq. Jordan receives billions of dollars each year in aid from the US, the European Union, and other nations, much of it destined for the millions of Palestinian and Syrian refugees in Jordanian camps.

In 2012, the year the king bought one of his high-end Washington properties, thousands of his subjects swarmed the streets of cities and towns across Jordan to protest the removal of a fuel subsidy – a decision that many Jordanians feared would plunge them into poverty. They danced and sang rhymes. They compared Abdullah to Ali Baba, the poor man in “The Thousand and One Nights” (or “The Arabian Nights”) who became rich by intoning “Open sesame” and then looting the 40 thieves’ cave full of gold and gems.

For the first time, protesters directed their ire at King Abdullah himself.

People chanted in the streets: “Oh, Abdullah son of Hussien, where did the people’s money go? There are those stealing millions and the rest eating plain bread”.

The Pandora Papers investigation reveals that Abdullah has owned at least 36 front companies in secretive tax havens.

Email exchanges found among the leaked files show that for Abdullah’s financial advisers, concealing the king’s links to the companies, and the properties they acquired, was Job One.

One of the king’s guides into the offshore world was Victoria Loraine, a British lawyer living on the shores of Lake Geneva, who owned a Swiss wealth-management company, Sansa Suisse SA. Sansa Suisse helped Abdullah form one of his earliest shell companies, Guinevere Enterprises Ltd., created in 1995 in the British Virgin Islands, according to records, which don’t say what it was for.

Another guide was Loraine’s business partner, Andrew Evans, a British accountant. Evans spent more than two decades with the branch office of accounting giant PwC in the United Arab Emirates, according to his LinkedIn profile, before launching two wealth-management firms in Switzerland, Khalij Fiduciaire SA and FidiGere SA. Loraine and Evans were president and secretary, respectively, of Khalij Fiduciaire SA, according to Swiss company records.

Through his companies, Evans acted as one of the king’s primary wealth managers and keeper of records, according to correspondence between him and Alcogal.

Names of a few of the king’s offshore companies appear to have geographic or religious references: Quba Ltd. to one of Islam’s oldest mosques and Zayer Ltd. to a word for tourists who visit holy places.

While the leaked documents don’t list the king’s individual properties, their location, details and value can be found by matching shell company names to public property records. Reporters identified 12 of the king’s companies as owners of real estate, including a US$6.5 million condominium in Washington’s chic Georgetown neighborhood purchased in 2012 by Zayer Ltd. In 2016, the king’s son, Crown Prince Hussein, graduated with a diploma in international history from Georgetown University, a 10-minute walk from the luxury apartments.

The documents don’t reveal the exact purpose or assets of other shell companies owned by the king. Some are described as owning unspecified investments in the US and Europe.

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Salah Uddin Shoaib Choudhury
Salah Uddin Shoaib Choudhury
An internationally acclaimed multi-award-winning anti-militancy journalist, writer, research-scholar, counterterrorism specialist and editor of Blitz. He regularly writes for local and international newspapers on diversified topics, including politics and counterterrorism. Follow him on 'X' @Salah_Shoaib

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