How to make big money from the poor
The Nation, December 18, 2013
People have unfortunately become accustomed to kidnappings for ransom of high profile people and the very rich. Unexpected was poor families being victimized in the same way: after all, they don’t have any money to give, not even savings.
Mr. Nadeem Qureshi, president of the upcoming Mustaqbil Party, was recently approached by a poor couple for help. The husband was a sweeper, the wife toiled at her sewing machine to make ends meet. Their son had been kidnapped and the kidnappers demanded Rs 50,000 for his release. They’d never seen that much money together in their life and were already in debt. It was a foregone conclusion that the police weren’t going to be helpful to nobodies. What further outraged him was a document the couple showed revealing how the government’s so-called Urban Poverty Alleviation Programme (which is part of the National Rural Support Programme) was making money from the poorest of the poor through blatant usury. Every monthly repayment of Rs 2000 consists of Rs 1500 of principal and Rs 500 in interest!
That rang a bell. Earlier, on a visit to Bilalwala village in the Thal, a local schoolteacher first told him of NRSP loans being made to the poor at an interest rate of 31% or 32% for loans of 15,000 to 30,000/- repayable in one year.
NRSP’s procedure is to form a village committee which has to guarantee all loans. A blank check is written in favour of NRSP drawn on Habib Bank where the committee has to have an account. (It was not explained why blank.) “If there is a default NRSP can cash the check. If there is no balance the committee goes to jail,” says Mr. Qureshi, “From what I know of banking, interest rates for borrowers are determined by the risk of the credit. The higher the risk of non-payment, the higher the interest rate. What is interesting here is that the credit is structured to be almost without risk — the committee acts as guarantor.”
Clearly, the interest rate was raking in far more than just the loan amount and charges to administer the credit. He points out that by comparison, Zarai Taraqiati Bank charges farmers 14% for loans which are backed by land deeds for collateral.
“Is this the way to alleviate poverty?”, he questions, “Is this the way micro credit works: by fleecing the already fleeced? Is this what Mohammad Younus got a Nobel Prize for?”
Not quite. Dr. Yunus started the microcredit programme over three decades ago with good intentions. It was for those who couldn’t provide collateral. One the other hand loan sharks would charge 10% interest a month, that is 120% a year – which even billionaires have never paid — and people were suffering horribly. But when the dirt-poor found a recognized scheme under which they were charged only one-sixth or one-fourth of what loan sharks took, it seemed like a godsend. So microcredit took off with a bang.
Then why has microcredit failed in poverty alleviation? Because, there were fundamental oversights. As overall costs of living rose over time, borrowers were barely able to keep their heads above water. But women especially were never really able to become non-poor or make any noticeable progressive improvement in their lives to rise to the next level, unless they were already small entrepreneurs and reasonably established in the local economy. This was also because, most never received the public services that better-off citizens always took for granted, such as healthcare, water and sanitation: they had to pay for each and everything.
Finally, just as bad, was that the local or global banking industry, never one to be left out from making an easy buck, jumped into the microcredit fray — which suited World Bank and other foreign aid donors since it paid for itself while perpetuating the myth that other parties were being charitable. Given that there are some three billion desperate poor ready to make a grab at microcredit rather than loan sharks, it was deemed the lesser evil.
“Shame and shame again on those who are running this usurious exploitative scheme,” says Mr. Qureshi, “These loans need to be made interest free. Then and only then will they go anywhere toward alleviating poverty.”
Shameful it certainly is, considering how much lip-service is paid to Islamic values while ignoring its condemnation of usury. And looking up the NRSP website, one discovers its association with USAID which tends to aid the giver rather than the receiver in more ways than one.
Microcredit should be – and can easily be – interest-free. It requires no foreign loans since there’s no need for imports or foreign expertise whatsoever for domestic purposes, especially at the grassroots. And yet, amazingly, our own bankers and planners fall for the superfluous.
As long as it is allowed to be just another profit-making enterprise, making money for shareholders, microcredit will fail. It has to be delivered as an essential and indispensable public service, non-profit but paying for itself, such as health or education, or water and sanitation. If working and exchanging goods and services for income are basic to livelihood and the economy, the right to credit must also be. After all, at least four-fifth’s of the money in Pakistan (nine-tenths or more in most industrialized countries) are not based on any real wealth but printed paper and mostly electronic numbers, simply for measuring comparative values of different things to determine fair exchange.
Why should the poor be penalized with higher interest rates just for being poor, that too in exchange for a service, not tangible wealth? – instead of being given their fair share of the commons or equivalent? It’s like asserting that the system has been made only for the moneyed. A public institution should not be practicing usury, that too on the basis of non-existent money in number form.
Citizens’ shares could easily be in the form of credit if not outright payment: an entitlement to use a certain amount of money up to a certain limit as a citizen’s right. Instead, governments have also gamed the system to exploit the poorest, thereby making the bankers and the rich richer.
“It is especially outrageous that an organization whose mission is reducing poverty is charging rates that would embarrass most loan sharks,” says Mr. Qureshi. It’s a point no party or government has touched to date but will soon have to.
The article was published in The Nation on 18 December, 2013