How Microfinance Failed the World's Poor

0:14Pram Tor is a farmer in northwest Cambodia. He's 40 years old. He and his wife have three kids.

0:26He grows vegetables like curly cabbage and wax gourd that he harvests by hand. He rents a plot of land from the government and he grows vegetables. And his wife sells those vegetables on the local market. Our colleague Gabriel Steinhauser went to meet him near his farm in Batambang province.

0:49A few years ago, Pram Tor and his family wanted to expand their small farm. The hope was that they ultimately could start earning more money. So he took out a loan from a local lender.

1:08He took a first loan of$1 ,000 to sort of, you know, buy some farming inputs and just sort of increase his yield. He thought, I can earn more money and, you know, like kind of make a better life for my family.

1:29The monthly payments were manageable, and he was able to pay the loan back easily. And that small loan of$1 ,000 helped grow his business. The perfect definition of microfinance and what it was supposed to do.

1:47Microfinance was created to provide small loans to poor people in developing countries. The idea is to allow people to pull themselves up by the bootstraps, to lend them money so they can start businesses, become entrepreneurs. That's the way it was supposed to work. And it did work for Promptor, at least at first. Then, in 2023, his loan officer encouraged him to take out a second loan. That loan officer was like, yeah, we can, you know, we can lend you more money and, you know, we can lend you$5 ,000 this time. With that$5 ,000 loan, Promtor could rent more land and hire some other workers.

2:34And how did that second loan work out for Promtor? It hasn't been that great. His plan to, you know, sort of massively increase his yield and income hasn't panned out. That year, the crops weren't bountiful enough. Frumtor's costs outpaced his revenue. Now, the debt has become a serious burden. The family makes only around$400 a month, and a third of that goes toward paying off the loan. The family has had to go to extreme lengths to save money, including eating fish paste and rice instead of more nutritious food. And if Prum Tor doesn't make his payments, he risks losing his family's land. It's the thing that keeps him up at night, right?

3:19I mean, this is something that I heard from him and other borrowers that I spoke to, like the psychological pressure of this looming debt is really tormenting. In your reporting, Gabrielle, how unusual did you find Promptor's story? Not unusual at all. The original goal of microfinance was to empower the world's most vulnerable people. Think of it as a market-based alternative to charity. It's sort of like the capitalist solution to global poverty. We don't need handouts, you know, we don't need to give people something for free. We just have to enable them and borough by borough. We're going to solve poverty writ large.

4:06And within, you know, a generation or two, the world would be a much different place. Well, surprise, surprise, there's still poverty in the world. It certainly hasn't lived up to the grand vision.

4:25Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, July 14th.

4:38Coming up on the show, how a promise to end global poverty failed.

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5:58Microfinance was established in the early 1980s. It was a time when Western countries had started scrutinizing the international aid system that had been around since the height of the Cold War. You have sort of the first questions arising around, like, you know, why are rich countries sending money to poor countries? Subsidizing. And there you have this very attractive solution that's sort of, you know, win-win. You can lend people money. You can even earn a little bit of interest. But it's not a handout. Right. It's a loan. Right. And it's this idea that's like, I'm not giving you money. I'm helping you start a business.

6:38And I'm going to get something out of it. And you're going to get something out of it. And everybody wins. Exactly. There's a business catchphrase for this. doing good while doing well. Microfinance was the brainchild of a Bangladeshi economics professor who'd studied in the U.S., Mohammed Yunus. Here we talk about millions of dollars and billions of dollars of development assistance to help... It's the 1970s. Mohammed Yunus is back in his home country in Bangladesh. The economic situation is really, really dire. And, you know, he sort of takes his students out of their classroom and they go into some of the rural villages that are really in the thick of this.

7:20We never paid any attention to people who needed such a small amount of money. In one of these villages, Eunice met a woman who made bamboo stools to sell. But she only earned pennies a day because she needed to borrow to buy the raw materials from a local vendor. Eunice intervened. So he speaks to her and the other women in the village and he realizes, oh, okay, they collectively owe like$27. So he lends them the$27. Himself? Himself, yeah. Okay. You know,$27. Not that much money. So my first response was to give$27 from my own pocket and tell them, please return the money to the moneylenders.

8:04And in his mind, one of the things that people in poor communities lack is this ability to borrow money. Yunus wanted to end poverty by upending the idea of who gets access to credit. After a few years, he founded a new bank to provide microloans to poor Bangladeshis. He called it Grameen Bank, which translates as village bank. Microfinancing in Grameen Bank spread across the country, and the project seemed to work. The power of a simple idea has changed lives in Bangladesh. Hundreds of thousands of impoverished people were able to borrow money to start small businesses. According to Grameen in the early 2000s, more than 90 percent of its borrowers paid back their loans.

8:55This success started attracting attention in international development circles. Microfinance spread to other parts of the world, like Latin America, Southeast Asia, and Africa.

9:08It was a huge deal, and it comes on the back of, like, years of hype. There's, like, summits, and people set big goals of how many borers they want to reach globally. All the hype around the idea culminated in 2006. I call upon Mohamed Yunus to give the 2006 Nobel Lecture. That year, Mohamed Yunus won the Nobel Peace Prize. Honorable members of the Norwegian Nobel Committee, Excellencies, ladies and gentlemen. In his speech, Younes talked about the future he envisioned once microfinance had spread far and wide. In a poverty-free world, the only place you would be able to see poverty is in the poverty museums.

10:00He said his grandchildren, and they wouldn't have to go to a rural village in Bangladesh to see the burden of poverty. They would actually have to go to a museum and find out about it that way.

10:16But the thing is, Yunus had always conceived of microfinance as a business, albeit one with a social mission. But there was no mechanism to guarantee that other banks would carry out microfinancing with those same goals. Because these were loans, not handouts, banks were charging interest. And some banks charged extremely high interest. In some Latin American countries, for example, rates can top 100%. You have people in the U.S. and Europe sort of like freaking out over like 3-4%, right? Sure. And that can really drive up the cost of your loans. All this attracted more investment, and microfinance kept expanding.

10:57And it became a really successful business, right? And it actually had pretty high margins. And so from that, I imagine banks are like, that seems like a good business to get into. Right. And, you know, in some ways, there are people who say that, you know, this commercialization is not bad, right? Like, it should become commercially viable. In the early 2000s, one such bank was from Mexico, Compartamos Banco. Compartamos had been backed mostly by nonprofit organizations and development institutions like the International Finance Corporation, which is the World Bank's private investment arm. And in 2007, Compartamos made an unprecedented move among microfinance banks.

11:44It went public. And international banks piled in. That IPO raised around$450 million. For the early backers, it was a windfall. And they walk away with billions and millions of dollars in profit. Since then, the industry has mushroomed. As of last year, there were about 140 million borrowers around the world. In total, they owe about$220 billion in microfinance loans. Meanwhile, critics say oversight has been lacking. Now, a lot of those borrowers find themselves deep in debt, unable to get out. Gabrielle went to the country where this problem is most acute. When you talk to people who follow this closely, Cambodia is really where we have the biggest crisis right now.

12:42You know, there have been periodic debt crises in other places, but the worst of the worst right now is in Cambodia. So how is this actually playing out on the ground? That's after the break.

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14:15Late last year, Gabriel was driving through the Cambodian city of Batambang.

14:25The first thing you notice is just how omnipresent microfinance is, right? Like any village, any main street you drive down, there's like four or five microfinance lenders that are set up there. So it's very visible. And then you talk to people and you find out almost everybody has one of these or several of these loans. Once you start paying attention, it's everywhere. These microfinance lenders were no longer, in many cases, you know, sort of NGOs or development projects, but they're commercial enterprises. Mohamed Yunus' original vision was small loans for people looking to start or grow their businesses.

15:10Today, not only have the sizes of loans ballooned, the money is also going to other needs. In many cases, these loans were not being made to, like, start a business, grow a business, right? They were being made to build a house, improve a house. There's people who suddenly have, like, you know, mom needs to go to hospital. There's a hospital bill to pay. Though these are real needs, using loans to pay for them isn't really in the spirit of what microfinance was originally supposed to do. build businesses to help people lift themselves out of poverty. Instead, these kinds of loans can end up further entrenching people in low-income situations.

15:56And some of these banks were circling back to the same borrowers for additional loans. And what they want to see is sort of, you know, the credit volume going up, right? And when you reach a point where almost everybody in the village already has a loan, the easiest way to keep growing your loan book is by lending the same people more money. So it sounds like it's creeping out, like, what these loans are being used for. Exactly.

16:29That's what happened to a woman Gabrielle met in Batambang. Hello. Hello. I'm Gabrielle. Samrit Sarau is the mother of three boys. and she took out her first microfinance loan in 2015 for$3 ,000.

16:50At that point, she's staying with her parents. They're really poor farmers. Their land's not very good. Samrit Sarau got the loan so she could buy fertilizer and other farm supplies she needed. She also used the money to fix the leaking roof on her parents' house. None of the spending actually increased Samrit Sarau's income, and she didn't have money to make her payments. So her mother took out a separate loan to help. And the interest rate is high, 18 percent, the highest rate allowed in Cambodia. If the family defaults, the bank could take their land.

17:32They're moving to the city to see if they can make some more money there. Her husband is a motor bike taxi driver. He makes like$7,$8 a day, maybe a little bit less on a bad day when fuel prices are going up, you know, like that eats into his income. And she's sorting trash at a recycling center. and still they can't make these payments. At some point they get evicted. Her oldest son actually at the age of 13 drops out of school to help his mom earn money like at the recycling plant. I mean, how much do they make? It can be as little as a dollar a day. When she really tears up is when she talks about that she really, really wanted her child to finish school and have sort of better prospects in life.

18:41And they just can't.

18:46You know, she describes to me these sort of like spiraling thoughts that she has. She's, at some point, she's thinking of taking her own life because she just feels so helpless. And this debt has really come to sort of dominate her life. Is there anything people like Samrit Sarau can do to get out from under this debt? What options do they have? They have very few options right now.

19:26A few years ago, two Cambodian human rights groups started documenting cases like Samrit Sarrao's and Promptors, who we talked about earlier. Those groups found cases where loans were given to borrowers who couldn't read and didn't understand the terms of the loan or its potential impacts on their lives. I'd seen the complaints from the human rights organizations, and those, you know, revolved around suicides, families pulling children out of school, families reducing their food intake, you know, all kinds of pretty shocking things. Those organizations filed a formal complaint with the International Finance Corporation, or IFC, which is part of the World Bank.

20:09This was the institution that had financially backed a lot of the lenders. The human rights organizations complained to the Ombudsman's Office, which is a kind of internal watchdog. The Ombudsman's Office spent a lot of time looking into these complaints. And in their report, they cited, I believe, two examples of loan officers telling borrowers that they should consider selling their children to keep serving their debt. And that's obviously just shocking. I mean, for the record, neither of these two borrowers acted on this, but that's probably the starkest example of the pressure that people are under.

20:50That report came out a few weeks ago. It concluded that the IFC hadn't monitored Cambodian lenders as closely as they should have. It also alleged that the IFC had violated its own policies. However, the board of the IFC did not agree with the findings and voted to reject the report. That's the first time that's ever happened. They just out and out rejected it and said that the ombudsman's findings were wrong? Yeah. That means microfinance lenders in Cambodia and elsewhere can continue operating as they have been. A spokesman from the IFC said the organization has ways of protecting borrowers and that it works with governments to improve regulation of financial institutions.

21:36He also said the cases in the report are, quote, complex situations of economic hardship and multidimensional cycles of poverty that do not stem from a single source. The IFC says it will work to address the harms faced by the specific complainants.

21:56Gabrielle says that academic research shows that on average, microfinance hasn't significantly improved people's livelihoods. And in some cases, it's made things worse.