SPIEGEL ONLINE by Sophia Sabrow | Micro-credits are supposed to help the poorest of the poor. But according to the erstwhile micro-finance analyst Hugh Sinclair, the initially well-intentioned idea is nowadays exploited by ruthless investors. Hugh Sinclair backed out of this sector and published a book, revealing the downside of micro-credits.
Micro-credits are credits lend to the poor in order to enable them to start their own small business, for instance by buying a suing machine and cloths and hence opening a tailor’s shop. With the earnings from their ‘micro businesses’ borrowers should be able to improve their living standard and repay their debts at the same time.
This idea stems from Muhammad who founded the Grameen Bank in 1983, which developed to a finance industry of 70 billion over the years. However, in recent years various critical reports were published. More and more scientific studies could not find any positive effects of micro-credits on the borrowers, but the contrary is rather the case: borrowers find themselves in a debt trap. Even micro-finance representatives admit meekly that the effects of micro-finance are unclear.
Exorbitant interests of up to 100 per cent per year and the brute methods, with which the paybacks are forced, lead to additional doubts about the social aspect of the bank.
In his book ‘Confessions of a Microfinance Heretic’, Hugh Sinclair reports about his ten years experience as employee and analyst of microfinance institutions and funds, an industry that has betrayed its ideals and systematically deceives the public. High interest rates enable microfinance institutions to operate profitably so that they attract investors to provide them with the necessary capital for further growth. However, the moral background of this idea was forgotten quickly and microfinance institutions started to increase their interest rates in order to achieve even higher profits for their investors. Another critical point is that there is no influence to ensure sustainable investment. Many borrowers spend their money continuously on medicine or nutrition for instance, falling more and more into the vicious cycle of debt without prospects of improvement. Furthermore, when debtors do not repay their loans, threats and violent methods are adopted to claim the money back. Sinclair found that amongst others the Deutsche Bank invested in microfinance institutions such as Lapo, which charged effective interests of up to 125 % per year.