There is a movie to be released next month. It's been released in Norway, but not in English, that exposes how the poorest of the poor are being used to provide interest profits via micro financing.

In retrospect, micro finance was a plan devised by the wealthy to help the poor 'help themselves'. A one-on-one measure to cure "the poverty".

However, except in very rare circumstances, micro finance has become micro loan sharking and has actually made the poor even more poor and destitute.



In India, one study by economists fromMIT's Poverty Action Lab found that only around one in five micro-loans resulted in the creation of a small business that would not have otherwise existed. The same study also found little or no evidence for a decrease in poverty levels a year after enrolling on the scheme.

Under the guise of "helping the poor", the poor pay 30%-40% interest on small amounts of money, a micro loan. The first payment is usually due within 7 days of the loan, and is to be paid weekly thereafter. If a poor debtor runs a risk of falling behind, there is another micro loan easily attained by a local loan provider. And so on. If the debtor dies or commits suicide, the debt is owned by the debtors survivors. There is no way out of being entrapped, once the debt mushrooms far beyond the ability for repayment. Families are ruined. Children are sold. People are beaten. Men with several wives milk the system, leaving a wake of indebted women behind them. All with little to now protection for the 'consumers'.

Sound familiar? This is a huge emerging market if it is allowed to spread as it intends to do because there are billions of prospective microdebt peons that will be thrilled to have a small amount of money for a moment of relief from deep poverty.

How it works. Condensed from several articles:

Uniquely, the original marketing model for micro loans in India cleverly used the Village Responsibility Culture to insure repayments. Groups would co-sign the loans, in essence, and apply pressure to the debtor in order to keep the entire group in a good light. Imagine having all of your neighbors calling you to a meeting to ask you to pay your debt(s) and humIliating you in front of the entire village if you couldn't make the payment.

Debtors spiral into deeper debt at usury rates of interest. Well, the truth on the ground wasn't made really public. It has been secreted until a wave of debtor suicides brought some much needed attention to the reality.

Secreted enough so that the Too Big To Fail-like banks go into the business to reap the rewards from interest paid by THE POOREST PEOPLE IN THE WORLD. Surely, they couldn't have know how much suffering was really taking place.

"Caught in Micro Debt" is supposed to be released in January, 2011, that exposes the ugly realities of how the poor are, once again, being exploited.

Speaking of the upcoming movie "Caught in Micro Debt", Milford Bateman writes:

And for those taking a microcredit just to buy a few items of food or clothing or shelter in order to survive until the next week, or until they get their next microcredit, the microfinance industry all too often represents a dangerous decent into microdebt peonage, not least thanks to high interest rates. This is what we are seeing today in Andhra Pradesh state in India, of course, as many of us have long warned would be the inevitable end result of its microcredit bubble.

More sadly, there has been a recent GrameenBank Leaks story. I would imagine most of us, via osmosis, have heard of the great successes of Grameen micro financing.

Apparently the "Successful Sufia Story", Poster Woman that helped launch micro finance was a hoax. Used as part of a marketing plan to promote micro finance.

Full details that address serious allegations about the foundation of micro finance and its founders can be found here. A couple of snippets:

In 1997 the Norwegian authorities discovered that 608 million kroner (US$ 100 Million approximately) aid from Norway and other countries contributed to the Grameen Bank was being diverted by Mohammed Yunus and his closest associates to a company that was engaged in an entirely different sector. When the Norwegian Embassy raised the alarm about the relationship in 1998, more than 50 million aid money had already been transferred to the For-Profit company Grameen Phone in which Norway’s Telenor is the largest shareholder. The whole matter had been kept a secret until now.... And then, perhaps the 2006 Nobel Peace Prize for Dr. Yunus and Grameen should have been given greater scrutiny. No reason at all to question the fact that Telenor, then majority investor of GrameenPhone, was and is a key sponsor of the Nobel Peace Center and other Nobel events, right? Or that Stein Tonneson, who nominated Yunus, used to work for Telenor? Norway is a small country. And the full prize granting process is only made public by the committee 50 years later; but one would be free to speculate.

If you read the above story, you will learn that the man who really owned the house Grameen pretended Sufia bought with your micro finance success windfalls, says he will sue Grameen if he doesn't stop using his house in a lie. Good grief! Sufia died in worse poverty than when she took out her first microdebt, or so the village tells the journalist..

Also, if you read this last article in total, you will find some background information that supports an allegation that Grameen's micro financing only survived through a great deal of subsidies from other areas, therefore, not a profitable model. Tax evasion is alleged as well.

Let's fast forward to see how The Big Wigs approached microfinance:

In 2008. Citi Foundation launches 11.2 million dollars International Microfinance Program.

Over the last decade (1997-2007), Citi India has provided funds in excess of 10 million dollars to its NGO partners. Sanjay Nayar, CEO, Citi India, said, “We are pleased to expand our partnership with Sa-Dhan at what we believe is a critical juncture for the micro-finance industry in India. Micro-finance has won tremendous acclaim as a tool for poverty reduction in recent years, but still faces numerous challenges. To date, the Citi Foundation has contributed nearly US$60 million in funding to support 250 micro-finance institutions, micro-finance networks and micro-enterprise programs in 55 countries.

Equitas announces the first ever rated micro-loan pool backed securitization transaction

S. Bhaskar, COO, Equitas said “Traditionally MFIs in India have had to access only Banks for debt raising, placing limitations. This transaction would open a new window to the industry to raise debt from those Banks not generally participating in funding to MFIs as well as other sources such as the Mutual Funds. For Equitas, this would also mean a lower cost of funds and when the market for such rated instruments sufficiently expands, the benefit of lower cost could benefit the ultimate clients” “The deal is in tune with IFMR Capital’s goal of creating valuable new asset classes, increasing marketability of asset classes to a broader universe of investors and expanding access to capital for micro-finance institutions,” said Sucharita Mukherjee, Senior Vice President, IFMR Trust and CEO, IFMR Capital. “This will be the blueprint for further securitisations and a benchmark for other MFIs,” she added.

SKS Microfinance Said to Raise Maximum Sought in IPO, August, 2010

*SKS, which received a non-banking finance company license from the Reserve Bank of India in 2006 and currently has 5.3 million customers, is India’s largest microfinance company by value of loans outstanding, number of borrowers and branches, according to Crisil. The lender on July 27 sold 3 million shares to anchor investors, which are institutions required to hold the shares for at least 30 days, at 985 rupees apiece, according to an e- mailed statement. Those buyers included Soros’s Quantum (M) Ltd. as well as funds controlled by Goldman Sachs Group Inc., JPMorgan Chase & Co. and Nomura Holdings Inc.

Goldman Sachs says bks risk from loans to micro finance institutions low

MUMBAI, NOVEMBER 19: Goldman Sachs Friday said the recent slide in bank shares on concerns over loan exposure to microfinance institutions is "not fully justified".

It, however, remained cautious on the banking sector because of slow earnings growth and expensive valuations.

Up next:

MICRO INSURANCE for the poor billions of people of the world.

You will probably not hear much about the Micro Finance disasters in India. However, hopefully with the upcoming release of the movie, Caught in Micro Debt the word will get out.

They are taking micro finance global. You don't have to be an economic genius to calculate how insanely profitable this can be, even if only 50% of the debtors make good on their loans, the investors will get their rewards.

The poor, sadly, will have a life of indebtedness to look forward to, in return for whatever temporary relief they received from their micro loans.

If this system is truly designed to help lift the poor, then why charge usury interest rates, have the first payment due in 7 days, and the entire loan paid in 1 year?

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Other resources:

Morgan Stanley’s Former India CEO Joins Microfinance Company

Microcredit 'death trap' for Bangladesh's poor

Dr Qazi Kholikuzzaman Ahmad, chairman of PKSF, a body that monitors microfinance, describes microcredit as a "death trap" for the poor. He explains how poor people often take up the loans without thinking of the consequences, and that 60% of borrowers take loans from several sources. "There is no understanding that it might take 10 or 20 years to repay their loan," he says. Furthermore, from the weekly repayments, some lenders deduct 10% of that payment for compulsory saving schemes - money the company then uses to lend to other people. "Interest on repayments begin at around 15%, but it is a flat rate and can soon rise to anything between 40% and 100%," Dr Ahmad says.

Saving holds key to women's empowerment

Sri Lanka's war widows Some individual partners of the network have already jumped on the savings bandwagon. Sri Lanka's Hatton National Bank (HNB) is one of them.

HNB has been at the forefront of Sri Lanka's micro-loan and agricultural loan industry for more than 20 years. But now it is also looking at changing its product and clientele. Sri Lankan forces defeated the Tamil Tigers last year. The bank wants to help tens of thousands of war widows - women whose husbands were killed in the conflict between the government and the recently-defeated Tamil Tigers.

HNB is targeting these women as potential clients, as soon as resettlement is completed in the former war zone. Here, too, the emphasis has shifted much more to saving, says HNB's Vishva Gunawardena. "What we have been doing is opening up a savings account for the customers to make their deposits."

Can you imagine the board rooms of some of these IPO profiteers: "Hey, there's a marketing opportunity opening up in Sri Lanka: War Widows.

Somedays, its embarrassing to think we might have something in common with those who think this way.

On the bright side, done properly there is no reason why poverty can't be alleviated. It just needs to stop being a Big Business:

Here was the thinking to end world poverty in 2002. A Market Solution, of course.Using Big Business to Fight Poverty

The solution is an entirely new engine of change: a World Development Corporation (WDC). This entity could be chartered by the United Nations and established as a joint venture by a select group of global corporations based in Asia, Europe, and North America. Assisted by rich governments and by loans from development banks, the WDC would bring to impoverished areas technology, credit, access to world markets, and management know-how. Its projects would need to be subsidized at first but should become profitable in the long run. This last element is critical, for there is not enough charity or taxpayer money to make a sustainable difference; only the profit motive can do that.

And here in America, we have Loan Sharks on Steroids. I wonder who subsidized the launches of the Pay Day Lenders across the country? Was it an IPO?

In the words of Bill Moyers: