Suicides in India show the dark side of micro-finance

How do you know that they wouldn't have killed themselves earlier if the loan didn't provide them some hope of success. Would his business have survived if he didn't take the loan?

Thanks for the post shrikant. Most people don't seem to realize this, and it's in part because of all the attention MFI's are getting rightnow. There's very little data and numbers available, but are some - http://microfinance.cgap.org/2010/11/11/who’s-the-culprit-ac...

This table, taken from the above blog post, was of particular interest. It describes what percentage of the loans are used for what. In looking at these numbers it's important to take into account the types of people to whom loans are given to - that is to say, someone that can get a loan from an MFI may not be able to get a loan from a Bank etc etc.

Also note that certain line items like 'Buy Livestock' may be much higher for something like a Bank because the bank's loan terms may incentivize certain types of loan utilizations.

Any time you see data like this, keep in mind it's far from clean and quite imperfect (data collection methods are door to door and done on foot), so take it with a grain of salt. Also, the columns may not add up to 100 because some double c counting goes on (i.e. if a respondent used the loan for more than one thing it will be counted more than once under separate categories) But if this data is an indication of what actually goes on in microfinance, it's not quite being capitalized for it's intended purposes. This seems explainable in that at the end of the day a line of credit is a line of credit no matter what verbage you attach to it. We call it a microfinance loan, but the people that receive these loans probably don't know what microfinance loans are; that's to say they probably just call them loans.

 		Usage of Loan Money by Type of Lender

				Bank	MFI	SHG	Informal
 Start new business		2.0%	2.5%	1.9%	1.1%
 Buy agricultural inputs	57.5%	13.2%	19.3%	19.9%
 Purchase stock			3.0%	9.9%	4.2%	2.7%
 Buy livestock			2.7%	6.0%	5.6%	1.7%
 Purchase land			0.8%	0.9%	0.7%	0.6%
 Home improvement		9.7%	22.1%	13.0%	14.2%
 Repay old debt			14.6%	25.4%	20.4%	7.0%
 Health				11.4%	10.9%	18.6%	25.3%
 Education			4.1%	4.4%	5.7%	5.3%
 Marriage			4.3%	4.8%	2.2%	12.2%
 Funeral			0.1%	0.2%	0.5%	1.7%
 Other festival			0.6%	3.5%	3.6%	4.8%
 Unemployment			0.0%	0.0%	0.1%	0.8%
 Purchase jewellery		0.5%	0.6%	1.6%	0.4%
 Other consumption		26.5%	31.6%	49.9%	24.9%

Every life counts. But I feel like this is only showing one side of the issue. Capital is distilled, economic trust. All human beings deserve a baseline level of trust. As such, access to capital is a human right. Without some form of trust extended to those in poverty (through capital lending or otherwise) how could they ever emerge from their poverty?

I hope this does not sound too callous. Every single suicide is a tragedy. But only 70 of 14,364 suicides were related to microloans -- only half a percent. 70 suicides represents only one millionth of Andhra Pradesh's population, a state with an infant mortality rate of 5.2%. If the actions of those 70 suicides merely improve infant mortality by even one percent for one percent of the population, microfinance will have paid itself back for the health of families several fold -- and for the families who strove and succeeded, not those who, by their own actions, created a situation they did not have the willpower to escape.

1.2 million people a year are killed by automobiles -- and yet they have given us tremendous freedom. The solution to the problem of automobile deaths is not an outright ban, but infrastructure, norms, and education -- which can drop deaths from nearly than 80 per annum per 100,000 inhabitants in Iraq and Iran to over 50 in South Africa to less than 5 in Canada, Australia and Argentina.

Though hundreds die from general anaesthesia each year, its positive impact on medicine and surgery has been tremendous. The solution to these deaths is not a ban, but improved education, environmental support, and systematic changes in health care (see for example: http://www.theatlantic.com/magazine/archive/2009/09/how-amer...)

Access to capital -- and more generally, access to trust, is a powerful force. Wielded properly, it is can be a tremendously powerful tool for good -- but also for harm.

I hope that these revelations will be a learning experience, and force us to think more deeply about how to connect with the impoverished. Clearly, access to capital alone is not enough to enable the ascension from poverty. But in many cases, it is a limiting factor. We must not retract willingness to lending of capital -- our trust in a whole class of impoverished people -- as a result of these early mistakes.

Capital - assets available for use in the production of further assets http://www.google.com/search?hl=en&source=hp&biw=120...

Baseline level of trust = 100% risk

100% risk = 0% return

0% return = Charity

That's not to say charity doesn't have a place in the world. But the conversation about microfinance is about empowering individuals, and you don't empower individuals by writing them a blank check. You empower them by helping them overcome difficulties (i.e. paying back loans that may or may not be favorable to them).

To touch a little more on the suicides, these loans are often structured such that 3 or 4 people are cosigned. So if I can't pay, the other cosigners have to pay. Social pressures can make people do extreme things. When the article says stuff like

Shobha, head of several groups of women borrowers, was being pressured to pay interest on her 12,000 rupee ($265) loan. Lenders also were demanding that she cover for the other women, even though the state had restricted microfinance activities two weeks earlier, Bloomberg Markets magazine reports in its February issue.

The don't point out that that's the kind of agreement she signed up for. There's no collateral, so the social pressure is intended to serve as the incentive to repay. Of course this has consequences. To draw a parallel, think about social pressures in an enclosed environment where people are counting on you, like the office or high school.

Why would a baseline level of trust equate to 100% risk?