FLASH
Shkruar nga Irena Beqiraj
In recent decades, giving small loans to poor people has been considered the golden solution to give the poorest the opportunity for a better life. But not everything in practice went as thought on paper. Yunus himself admits that microcredit from an "opportunity to help people get out of poverty turns into an opportunity to make money from poor people."
An acquaintance of mine may lose his house because he borrowed 200,000 Lek, not realizing that he would have to pay back more than double it in a year. Thousands of other Albanians may be in a similar situation: the Bank of Albania has announced that the interest on consumer microloans reached 118.96 percent during 2023. The situation will continue to be the same in 2024. For this year, The Bank of Albania predicts that the interest on consumer loans up to ALL 200,000 will reach around 100 percent. So, a citizen who will receive a loan of 200,000 ALL will have to pay back a maximum of 400,000 ALL with interest at the end of the year. For the same loan value, the maximum he had to return in 2023 was 437,000 ALL—a slight improvement from the previous year.
Nobelist Professor Muhammad Yunus, considered the father of the "social" microcredit business, says that "credit is a human right and should be treated as such". He believes that microcredit enables the poor to rise out of poverty by providing them with the financial means to realize their entrepreneurial potential, because the poor are just as adept at playing the market game as anyone else.
In recent decades, giving small loans to poor people has been considered the golden solution to give the poorest the opportunity for a better life. But not everything in practice went as thought on paper. Yunus himself admits that microcredit from an "opportunity to help people get out of poverty turns into an opportunity to make money from poor people."
This seems to have happened in Albania, for a number of factors. First, lenders have applied exploitative interest rates instead of acceptable rates; secondly, instead of microloans being used to realize entrepreneurial potential, most of them have been used to finance consumption, therefore they have had minimal impact on increasing the income of loan recipients; third, aggressive debt collection tactics, often orchestrated by vested interest groups, and the failure of regulatory institutions to act in time have resulted in massive extortion of lenders who have been unable to repay on time.
Acceptable interest rate or exploitative interest rate?
As I mentioned above, the poor who will receive microloans this year will have to pay back double the amount of the loan, as a result of the staggering interest. Borrowing 200,000 Lek and paying 400,000 Lek for a year is a cost that could ruin anyone, especially the poor. Yunus says that interest rates should only be about 10–15 percent higher than the cost of providing capital. So if the average cost of securing capital, securing the funds it uses to lend, for a microcredit institution is 15 percent, then the interest on microloans should be between 25 percent and 30 percent. According to Yunus, interests higher than this level are abusive.
Undoubtedly, a microcredit institution has higher operating costs as it costs more to handle ten loans of 30,000 ALL than one loan of 300,000 ALL. But the question that awaits an answer remained: Even if the capital insurance and operating costs justify the interest at the 100 percent level, who does this business serve? At such rates, microcredit has turned from helping people out of poverty into an opportunity to make money from poor people.
While the microcredit industry in Albania is growing and becoming ever more aggressive, claiming to be able to secure funds from entirely private sources (Kredo Finançe is even seeking to issue bonds with a private offer for the first time in Albania), world experience shows that microcredit institutions apply reasonable interest only when a part of the capital is provided by funds with very low rates given by the government or international donors.
Microcredit to encourage entrepreneurship among the poor, or microcredit to finance consumption?
In 1997, the Grameen Bank and the Norwegian company Telenor set up a microcredit scheme in Bangladesh to finance the purchase of a mobile phone by women, who then use it to provide premium calls to their neighbourhoods. The "phone ladies" generated an income of $750 to $1,200 a year, when the average annual income per capita in Bangladesh was about $300. This example illustrates what many studies have proven: microcredit is only useful when it finances a tool, or an idea that enables the borrower to create additional income.
While it started as a financing option for small individual enterprises, microcredit has now shifted to financing consumption—individuals, including those with low incomes, are given the opportunity to buy goods and services (cell phones, vacuum cleaners) with very high interest loans , washing machine, holidays, etc.). With these loans, you can also buy alcohol, drugs and indulge in other vices.
Microloans used for consumption provide no opportunity to generate additional income—they simply sink individuals into debt. Thomas Dichter, renowned researcher of microfinance programs, points out that no individual gets out of poverty by taking microcredit; what ends poverty is the combination of labor and capital.
Extreme commercialization, high interest rates, ease of obtaining consumer microloans that do not generate additional income, have been accompanied in the last decade with aggressive tactics of their collection. As a result, in the conditions of the lack of protection of borrowers from loans with exploitative interests, many poor families find themselves in financial difficulties and more ruined than before.
Experience, this rude teacher, which our policy makers have an impressive ability to ignore, shows that economic development and poverty reduction are the natural enemies of the "happiness" (profits) of microfinance services and vice versa. According to official reports, for the year 2023 in our Albania, microcredit companies doubled their profits. It is clear who has won so far in this battle.
Lini një Përgjigje