Microfinance is seen as a lifeline for the world's poor yet what happens when they are charged interest rates of up to 60 percent?
NEW DELHI (AlertNet) – Organisations offering small loans to help people rebuild their lives after a humanitarian crisis need to be regulated to prevent vulnerable communities from being exploited and charged high interest rates after a disaster or conflict, aid workers say.
Microfinance is fast emerging as a way of tackling financial exclusion in South Asia and is considered an untapped market, with over 58 percent of the region’s adult population unable to access services such as banks, ATMs, loan and deposit accounts, according to the South Asian Microfinance Network.
But while aid workers welcome microfinance institutions (MFIs) as a way of helping the poor, they say in the aftermath of a crisis, high interest rates – sometimes up to 60 percent -- should not be charged to people who have lost their homes and livelihoods.
“Disasters and conflicts amplify the power and poverty fault lines in a community and their negotiation power is diminished after a crisis – so they can’t bargain the interest rates,” said Unni Krishnan, disaster response coordinator for Plan International.
“Just as we have the international standards which NGOs (non-governmental organisations) follow for humanitarian response, for things like the amount of water which should be distributed to people, there needs to be some sort of global standard for post-crisis microfinance that puts people above profit.”
MICRO LOANS, MASS DEBTS
In the aftermath of Cyclone Sidr which struck Bangladesh’s coastal belt in November 2007, survivors reported that they were saddled with debts after they took loans with interest rates at 30 percent to rebuild homes.
The mainly farming and fishing communities -- whose homes were destroyed when Sidr whipped up a tidal surge that killed 3,500 people and inundated scores of villages -- said they were forced to borrow funds because little relief was provided by authorities and the aid community.
Community leaders in one of the worst-hit areas, Jhalakathi district, have accused some MFIs of taking advantage of cyclone survivors, saying they were lured by lenders when they were at their most vulnerable.
Aid workers say this is a situation they have come across in other parts of the world after a disaster, but most frequently in Bangladesh -- the birthplace of the global microfinance movement, where it is touted as a model of how the rural poor can lift themselves out of poverty.
Lenders argue that high interest rates are justified due to the operational costs of making and collecting door-to-door payments in remote rural areas on millions of tiny loans. This, they say, is still the best option available to much of the world’s poor.
“Tens of millions of poor people borrow from micro-lending organisations because it is better than the alternatives available to them -- being credit starved or going to loan sharks,” Alex Counts, president of the Grameen Foundation, told AlertNet.
“Interest rates are coming down globally despite the fact that most micro-lenders receive little if any subsidy from philanthropic sources. In some of the most mature markets, interest rates are 15-25 percent though there are many in the 30-40 percent range, and some above that.”
Last month, the Bangladeshi government decided to cap interest rates for micro-loans at 27 percent, partly due to growing criticism that high rates were keeping the poor in a debt trap.
Indian authorities are also mooting a bill to regulate micro-lenders because of concerns they are charging high interest rates. The move also follows reports linking aggressive debt collection with the suicides of poor borrowers.
CASH AS AID
But while aid workers argue that quick cash is necessary in the emergency phase of a humanitarian crisis, micro-credit may not be the answer.
“Cash grants are gaining more acceptance within the humanitarian community, as well as with affected populations, as it is a more dignified form of relief and gives people the option to chose the things they need,” said Sajjad Mohammad Sajid, Christian Aid’s Emergency Manager in South Asia.
“It helps boost markets as markets stop functioning due to the lack of cash -- and so it pumps money back into the market and allows shopkeepers to start functioning again.”
Aid agencies like Plan International have been giving one-off cash grants of $60-$75 to families affected by October’s floods in Vietnam as well as providing grants of $100 to Pakistanis hit by the July/August floods in.
Plan International’s Krishnan said it was increasingly common for cash-for-work schemes to be set up after a disaster. Plan itself is currently offering cash to people in cholera-hit Haiti in exchange for disinfecting contaminated wells and cleaning toilets in schools.
“A combination of relief -- as some materials such as clean water and food will not be quickly available in the emergency phase -- and cash is the best approach,” said one aid worker.
“People shouldn’t have to repay loans after a disaster … we don’t expect people to pay us back for the food and blankets which we provide, so why should they pay us back for the cash we give them?”
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